Procter & Gamble: CEO Regression Comes at a Big Price

NEW YORK (TheStreet) -- If Procter & Gamble (PG) was a baseball team and the manager was fired, you wouldn't expect it to go over to the high-cost box seats and rehire its old manager.

Well, maybe you would, but would you pay him (or her) 25% more than you were paying the manager you just fired? The fans would be confused and boos might start to overcome the cheers. We're not talking about the New York Mets here. This is a publicly traded, widely held corporate behemoth with a market cap of more than $216 billion.

After firing controversial CEO Robert McDonald P&G caused the equivalent of shareholder whiplash by bringing back former CEO A.G. Lafley. It seemed obvious that the board of directors didn't like the direction the company was heading yet they didn't have an heir apparent to promote.

At the company's unremarkable Web site I found a news release with a 1980s looking portrait of a smiling McDonald. From the portrait one might think the news for him was about to be delightful.

Instead the headline read, "A.G. Lafley Rejoins Procter & Gamble as Chairman, President and Chief Executive Officer." Then in italics the subtitle, " Bob McDonald Retires from the Company after 33 Years." As Archie Bunker used to say, "Whoop-tee-doo!"

Reading the above release we learn that Lafley was also appointed to serve on the board of directors as its new-old chairman. That helped me understand why he's evidently worth a daily base salary of $5,555.55 based on a 260-day business year. With a $2 million annual base salary a CEO can feel quite motivated as well as comfortable.

Not that he has an easy assignment. Jim McNerney, the presiding director of P&G's board at the time of the announcement said, "A.G.'s track record and his depth of experience at P&G make him uniquely qualified to lead the company forward at this important time."

McNerney said, "The board expects A.G. to further improve results, implement the current productivity plan and facilitate an ongoing succession process. The board is confident that he will continue improving P&G's performance." Then the usual parting platitudes were said about McDonald. The bottom line for Lafley is he has a lot to live up to and he's a "lone corporate star."

At least seven senior executives departed P&G before McDonald's "retirement" and since he took over as P&G's CEO. One of them was a respected and competent leader, Charles "Chip" Bergh who is now the CEO of privately held Levi Strauss & Co. Another was Daniela Riccardi who's since been named CEO of Baccarat SA.

If you were prescient enough to exit P&G's shares when it reached the April 23, 52-week high of $82.54 you're probably feeling quite satisfied now that the shares are 4.4% lower (as of the closing price of $78.90 on May 29). Shares may be on the way to testing the April 25 low of $76.35.

P&G's stock price moved up more than 25% in the past year, as is illustrated in the chart below. Since October 2012 both the trailing 12-month revenue per share and the year-over-year quarterly retained earnings growth has been part of the stock's meteoric rise. PG Chart PG data by YCharts

So now if I were the recycled CEO of P&G what would I do to help shine up the company's somewhat tarnished sheen? I'd begin by reassuring shareholders by presenting a detailed plan to lower costs and improve the company's operating margin.

As of the quarter ending March 31, 2013 P&G's operating margin was around 20%. That's not bad but it happens to be nearly 15% below its competitor Colgate-Palmolive ( CL). During the same quarter Colgate notched a 23.43% operating margin.

Then if I were CEO I'd tell investors that P&G will maintain its profit margin advantage. P&G's 15.6% profit margin is 14.7% higher than CL's 13.6% profit margin. I'd inform the financial press about P&G's most lucrative product lines and explain incentives to increase those highly profitable activities.

In all fairness to well-compensated Lafley, he did comment during a May 24 phone conference with P&G managers (according to a Wall Street Journal story on May 25) that his priorities were to strengthen the company's operations in both developed and emerging markets. Another priority he mentioned was to increase to capacity the company's "innovation pipeline" while cutting operating costs.

The hard decision for the returning CEO and chairman is whether to talk about the plan to succeed him. The last thing Procter & Gamble needs more of is uncertainty and controversy. Top institutional holders like The Vanguard Group, which owned almost 5% of the outstanding shares as of March 31 will be closely following Lafley's game plan.

Activist Investors like Bill Ackman and his company Pershing Square Capital Management will also be monitoring P&G's direction and progress. Ackman was no fan of former CEO McDonald and undoubtedly had a voice in his ouster.

As of March 31 Ackman and his company controlled almost 28 million shares of P&G valued then at more than $2 billion. With P&G's relatively high forward (1-year) P/E ratio of over 18 and a price-to-earnings-to-growth ratio (5-year expected) also at the high level of 2.55 the share price may fall further.

Shareholders may find the $2.41-per-year dividend a more comforting "floor" when the share price delivers a yield-to-price of 3% or higher. In order to do that P&G's stock doesn't have to decline much further. At $78.60 the dividend yield-to-price becomes an encouraging 3.07%.

Time will tell if Lafley is worth his generous salary. Patience among big shareholders and activist investors is usually in short supply, so the faster he can steer this big corporate team to victory the better for all involved.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

More from Investing

10 Key Takeaways From Google's Solid Earnings Report

10 Key Takeaways From Google's Solid Earnings Report

Amazon Is as Well-Positioned as Anyone to Create a Popular Home Robot

Amazon Is as Well-Positioned as Anyone to Create a Popular Home Robot

Bitcoin Today: Prices Flirt With $9,000 After Weekend Boom

Bitcoin Today: Prices Flirt With $9,000 After Weekend Boom

Tech Stocks Have You Baffled? Educate Yourself in Some Portfolio Diversification

Tech Stocks Have You Baffled? Educate Yourself in Some Portfolio Diversification

Halliburton Rises Slightly After Revenue Jump

Halliburton Rises Slightly After Revenue Jump