Submitted by Jake Peacock as part of our contributors program.
Last Thursday’s news Proctor & Gamble (NYSE: PG) bringing back an old CEO was met with wild optimism on the Street with shares climbing 4% on the back of the announcement. The company announced that Alan George “A.G.” Lafley has rejoined the company as President and Chief Executive Officer, effective immediately. He has also been elected to the Board of Directors and will serve as its Chairman. Mr. Lafley joined Procter & Gamble in 1977 and served as President and Chief Executive Officer from 2000 to 2009. He succeeds Robert A. “Bob” McDonald, who is retiring from the company on June 30, 2013, after 33 years of service.
Obviously Mr. McDonald did not have the best run as the CEO of the Dow Jones component, but top management of well-diversified, well-ingrained into the society, companies such as Proctor & Gamble don’t need a lot done at the top to continue delivering record earnings and cash flows. That is what makes them so great. The companies are so solid that even bad management teams can’t mess them up. The share performance of P&G’s stock shows that. The stock has produced a return for shareholders just above the S&P 500 over the past year, not including dividends, which is $2.41 per year.
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Despite the solid performance, investors were unhappy. CEO Bob McDonald lost the confidence of employees and some of its largest institutional investors, analysts say. Last month, it reported weaker than expected sales and said its current fiscal fourth-quarter profits would be lighter than analysts expect.
UBS, part of the widely optimistic crowd banking on Lafley’s return, quickly upgraded the stock after the announcement. Analyst Nik Modi wrote that Lafley could serve as a “catalyst to at least start the P&G Spin Cycle” and reinvigorate sales.
It is widely reported that the strategy won’t change from previously laid out plans. P&G has a plan in place to improve results in developed markets while maintaining momentum in the developing nations. The company is focusing on the 40 of its largest and most profitable businesses, most of which are in developed markets. These businesses account for about 50% of sales and 70% of operating profit. In addition, the company has implemented costs-savings and productivity-improvement initiatives which are expected to generate $10 billion in cost reductions by the end of fiscal 2016.
All of these insights into the company and changes that P&G is looking forward are great, and make me more optimistic on the shares. However, my sentiment hasn’t changed much as long as P&G continues to sell the toothpaste, laundry detergent, batteries, razors, and other household products that consumers have grown to love and continue to use every day.