Should Procter & Gamble Split?

Procter & Gamble (NYSE: PG) has endured a tough year. At its recent $75 share price, P&G shareholders have suffered a 14% loss this year, and that figure even includes its dividend payments. That is surely a disappointing performance for one of the world’s biggest companies with more than 20 billion-dollar brands.
In response, the company embarked on a major turnaround strategy. It is aggressively selling off low-growth brands deemed non-critical to the company’s future, and it is reinvesting the proceeds in its most promising growth categories. P&G also intends to buy back a great deal of its own stock going forward to try to support its stock price.
But some don’t think P&G should stop there. An article in Barron’s last month called for the company to consider splitting itself up. It argued for P&G to separate its beauty products, health care and grooming, and home and family care businesses.
A spinoff makes sense for P&G and could create value for shareholders, but here’s why there may be better reasons to buy P&G stock.

Why a Procter & Gamble Split Makes Sense

Procter & Gamble has suffered a number of headwinds throughout the year, including the rising U.S. dollar – which has eroded international revenue growth – and a product portfolio that has become bloated. The company’s total sales fell 5% in fiscal 2015.
P&G is undergoing a major streamlining of its product portfolio. Investors likely recall its sale of the Duracell battery business to Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) for $3 billion and its huge $12 billion sale of 43 beauty brands to Coty Inc. (NYSE: COTY) earlier this year. Eventually, the company intends to sell as many as 100 brands.
But this process will take a long time. P&G is a huge company with a market capitalization in excess of $200 billion. A company this massive does not turn around quickly. A spinoff could create value sooner. The article in Barron’s article estimated the three individual pieces of P&G, trading independently, could collectively be worth $90. That represents a 20% premium to P&G’s current equity value.
It makes operational sense to split the company. Each of the three segments is a large enough business to be able to stand on its own.
And there could be a financial reason to split, if the separate companies hold a higher cumulative value than they did as a single entity. Investors pursuing the split believe the sum of its parts is worth more than the whole.

P&G Is a Buy, But Not Just for the Split

Other struggling companies in the consumer goods industry, like ConAgra (NYSE: CAG), have pursued spinoffs this year as a means to create additional value for shareholders. And P&G itself is no stranger to divesting large business segments.
It makes financial and strategic sense for Procter & Gamble to pursue a spinoff. However, investors should focus more on whether the P&G turnaround succeeds. They should closely monitor its quarterly earnings results going forward to make sure the company remains on track. Restoring growth in its most important product categories is the bigger concern for investors over the long term.
Another good reason to buy P&G stock is its generous dividend. P&G yields nearly 4%. Its payout has not been this high in the past five years. Moreover, it’s a top dividend growth stock, with 59 consecutive years of annual dividend increases under its belt.
As a result, there are many valid reasons to invest in P&G stock, in addition to the spinoff rumors – namely, its portfolio restructuring, reliable cash flow and high dividend.

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