NEW YORK (TheStreet) -- Procter & Gamble (PG) - Get Report and its CEO, Alan Lafley, are feeling some heat this summer, and I don't mean just from the weather. It's been a little over a year since the iconic consumer goods company announced Lafley would replace then CEO Robert McDonald.

McDonald was in the early innings of a turnaround initiative to cut $10 billion in costs through 2016. His plan to revitalize P&G's focus on its leading businesses after losing market share to such rivals as Unilever (UN) - Get Report was interrupted when activist investor Bill Ackman purchased $1.8 billion of PG stock and pushed to replace McDonald.

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Now the stock is below the level it rose to after Lafley replaced McDonald. Shares closed Monday at $80.19, down 1.5% for the year to date. After reporting flat first-quarter revenue numbers the company also confessed that its year-over-year quarterly earnings growth had risen a paltry 1.7%.

Although P&G raised its dividend to $2.57, making the yield-to-price a tempting 3.21%, this lifted the payout ratio to 65%. That ratio won't subside until the company's earnings growth increases. That is precisely what the company's largest shareholders are waiting for.

Growing earnings shouldn't be difficult for a company that serves approximately 4.8 billion people globally with its panoply of brands.

The company's Prilosec OTC remains the #1 best-selling over-the-counter frequent heartburn medicine for nine straight years. Yet, if I were the CEO and saw the following one-year price chart of my company's stock, I might require some heartburn relief.

data by YCharts

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The blue price line looks like a roller-coaster ride for investors. The orange quarterly year-over-year retained earnings and the red trailing twelve month diluted earnings per share lines both look like precipitous followed by a tiny rebound for EPS.

CEO Lafley is personally impacted by the stock's volatility. As of June 30 he owned nearly 627,000 shares valued at over $50 million!

Ackman's Pershing Square Capital Management exited its stock position in PG during the first quarter of this year, according to a filing on May 15. So far none of the other big activist investors have taken major positions in the stock.

As of March 31 about 34% of P&G's outstanding shares are owned by institutional or mutual fund companies. That leaves a huge number of shares available for activist investors aware of the under-performance in 2014.

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The company reports second-quarter earnings on Aug. 1 and will webcast a discussion beginning at 8:30 a.m. ET. My sense is that if revenue is down and EPS isn't up at least 15% from the year-ago quarter, activist investors may start circling this consumer products behemoth.

Carl Icahn is busy with Family Dollar Stores (FDO) and Nelson Peltz has his attention on Pepsico (PEP) - Get Report, so I'm not anticipating their involvement. But there's always Third Point's Dan Loeb or the return of Bill Ackman. Both might consider the breakup value of Procter & Gamble as a reason to engage.

With most of the Dow 30 companies up for the year, investors should be heartened that P&G remains in the "bargain bin." Consider accumulating on dips below $80 and buy more after the Aug. 1 earnings report.

The future may not look rosy for P&G's CEO but shareholders have compelling reasons to own the stock. Where else can you find such a juicy dividend yield and the possibility of history repeating itself with an activist investor helping goose shares higher? To me it's a win-win!

At the time of publication the author had positions in FDO and PEP.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


TheStreet Ratings team rates PROCTER & GAMBLE CO as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate PROCTER & GAMBLE CO (PG) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has slightly increased to $4,109.00 million or 6.39% when compared to the same quarter last year. In addition, PROCTER & GAMBLE CO has also modestly surpassed the industry average cash flow growth rate of 3.52%.
  • PROCTER & GAMBLE CO's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PROCTER & GAMBLE CO increased its bottom line by earning $3.87 versus $3.12 in the prior year. This year, the market expects an improvement in earnings ($4.19 versus $3.87).
  • The net income growth from the same quarter one year ago has exceeded that of the Household Products industry average, but is less than that of the S&P 500. The net income increased by 1.7% when compared to the same quarter one year prior, going from $2,566.00 million to $2,609.00 million.
  • The current debt-to-equity ratio, 0.52, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that PG's debt-to-equity ratio is low, the quick ratio, which is currently 0.50, displays a potential problem in covering short-term cash needs.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 1.5%. Since the same quarter one year prior, revenues slightly dropped by 0.2%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of