PG The Procter Gamble Company Sector: Consumer Staples HOLD · Proctor & Gamble Co. (NYSE:PG) is one of the leading Consumer Products company in the world. With nearly 76 billion

Analysts: Aleck Boyd, Dario Munoz Poletti,

Bernadette Smith and Sara SpechtWashburn University

Applied Portfolio Management

Report Date: 4/18/2016

Market Cap (mm) $225,342 Annual Dividend $2.63 2‐Yr Beta (S&P 500 Index) 0.58 The Procter & Gamble Company

Return on Capital 38.2% Dividend Yield 3.2% Annualized Alpha ‐1.0% Compared With:

EPS (ttm) $3.03 Price/Earnings (ttm) 27.5 Institutional Ownership 6.4% Colgate‐Palmolive Co.

Current Price $83.10 Economic Value‐Added (ttm) $9,329 Short Interest (% of Shares) 1.1% The Clorox Company

12‐mo. Target Price $84.50 Free Cash Flow Margin 18.6% Days to Cover Short 2.8 and the S&P 500 Index

Business Description

Total Revenue ‐2.4% Free Cash Flow 13.1%

EBIT 0.6% Total Invested Capital 5.7%

NOPAT 1.7% Total Assets ‐0.7%

Earnings Per Share ‐12.8% Economic Value‐Added 0.9%

Dividends Per Share 6.6% Market Value‐Added 12.4%

2011 2012 2013 2014 2015

19.1% 17.8% 17.6% 19.2% 19.5%

N/A 11.9% 10.9% 8.7% 18.6%

6.6% 6.4% 5.4% 5.4% 3.3%

3.1% 3.5% 3.0% 3.1% 3.3%

2011 2012 2013 2014 2015

4.21 3.91 4.12 4.28 2.59

1.97 2.14 2.29 2.45 2.59

4.31 3.88 3.98 4.50 4.13

N/A 3.56 3.17 2.57 5.23

Datasource: Capital IQ

PG The Procter & Gamble Company Sector: Consumer Staples HOLD

Free Cash Flow Margin

The Procter & Gamble Company, together with its subsidiaries, manufactures

and sells branded consumer packaged products worldwide. It operates through

five segments: Beauty, Hair and Personal Care; Grooming; Health Care; Fabric

Care and Home Care; and Baby, Feminine and Family Care. The Beauty, Hair

and Personal Care segment offers antiperspirants and deodorants, personal

cleansing, cosmetics, skin care, hair care and color, prestige, and salon

professional products under the Head & Shoulders, Olay, Pantene, SK‐II, and

Wella brands. The Grooming segment provides blades and razors, pre and post‐

shave products, and other shave care products, as well as electronic hair

removal devices under the Fusion, Gillette, Mach3, and Prestobarba brands.

Investment Thesis

Proctor & Gamble Co. (NYSE:PG) is one of the leading Consumer Products

company in the world. With nearly 76 billion dollars in revenue in 2015 the

company has maintained a strong competitive advantage in market share

and even with a decrease in sales due to political and currency risks we

expect revenue growth to increase in 2017. With a highly refined marketing

and brand management skills, the strategic brand consolidation is expected

to increase sales. While the firm suffered from political and currency risks,

P&G's future looks promising due to a strong competitive position. The

stock price is fairly valued by investors and we suggest that investors hold

the stock due to strong commitment to dividends and sustainable

competitive advantage.

ANNUALIZED 3‐YEAR CAGR

Margins and Yields

Operating Margin

NOPAT

Free Cash Flow

Earnings Yield

Dividend Yield

Per Share Metrics

Earnings

Dividends

‐25%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%PG ^SPX

‐25%‐20%‐15%‐10%‐5%0%5%

10%15%20%25%

PG CL CLX

0

5

10

15

20

25

30

35

2012 2013 2014 2015

Price/Earnings Price/Free Cash Flow

$0

$2,000

$4,000

$6,000$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2011 2012 2013 2014 2015

EBIT Net Operating Profit After Tax

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000

2011 2012 2013 2014 2015

Economic Value‐Added Market Valued‐Added

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015

ROA ROE ROIC

The Procter & Gamble Company PG Sector Consumer Staples Colgate‐Palmolive Co. CL Sector Consumer Staples

2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Total Revenue 81,104 82,006 80,116 80,510 76,279 Total Revenue 16,734 17,085 17,420 17,277 16,034

Cost of Goods Sold 39,859 41,411 39,991 40,611 38,248 Cost of Goods Sold 7,100 7,146 7,187 7,139 6,615

Gross Profit 41,245 40,595 40,125 39,899 38,031 Gross Profit 9,634 9,939 10,233 10,138 9,419

SG&A Expense 25,750 25,984 26,000 24,402 23,158 SG&A Expense 5,748 5,910 6,086 5,920 5,400

R&D Expense 0 0 0 0 0 R&D Expense 0 0 0 0 0

Dep. & Amort. 0 0 0 0 0 Dep. & Amort. 0 0 0 0 0

Other Oper. Exp. 0 0 0 0 0 Other Oper. Exp. 22 37 27 71 82

Operating Income 15,495 14,611 14,125 15,497 14,873 Operating Income 3,864 3,992 4,120 4,147 3,937

Interest Expense (831) (769) (667) (710) (626) Interest Expense (58) (80) (116) (130) (133)

Other Non‐Oper. Exp. 271 55 60 56 131 Other Non‐Oper. Exp. 6 7 5 7 15

EBT ex‐Unusuals 14,997 13,974 13,606 14,944 14,529 EBT ex‐Unusuals 3,818 3,984 4,134 4,130 3,926

Total Unusual Exp. 0 (1,446) 573 (607) (2,683) Total Unusual Exp. (29) (110) (569) (597) (79)

Earnings Before Tax 14,997 12,528 14,179 14,337 11,846 Earnings Before Tax 3,789 3,874 3,565 3,533 3,847

Income Tax Expense 3,299 3,378 3,226 3,019 2,916 Income Tax Expense 1,235 1,243 1,155 1,194 1,215

Net Income 11,797 10,756 11,312 11,643 7,036 Net Income 2,431 2,472 2,241 2,180 1,384

Earnings per Share $4.21 $3.91 $4.12 $4.28 $2.59 Earnings per Share $2.49 $2.60 $2.41 $2.38 $1.53

Dividends per Share $1.97 $2.14 $2.29 $2.45 $2.59 Dividends per Share $1.14 $1.22 $1.33 $1.42 $1.50

Effective Tax Rate 22.00% 26.96% 22.75% 21.06% 24.62% Effective Tax Rate 32.59% 32.09% 32.40% 33.80% 31.58%

Total Common Shares 2,804 2,751 2,743 2,720 2,712 Total Common Shares 977 952 931 915 902

Year‐end Stock Price $63.57 $61.25 $76.99 $78.59 $78.24 Year‐end Stock Price $46.20 $52.27 $65.21 $69.19 $66.62996 997 998 999 1000 996 997 998 999 1000

Assets 2011 2012 2013 2014 2015 Assets 2011 2012 2013 2014 2015

Cash and Equivalents 2,768 4,436 5,947 8,558 6,845 Cash and Equivalents 878 884 962 1,089 970

Short‐Term Investments 0 0 0 2,128 4,767 Short‐Term Investments 72 116 173 200 102

Total Cash & ST Invest. 2,768 4,436 5,947 10,686 11,612 Total Cash & ST Invest. 952 1,003 1,136 1,290 1,072

Total Receivables 6,275 6,068 6,508 6,386 4,861 Total Receivables 1,675 1,668 1,636 1,594 1,427

Inventory 7,379 6,721 6,909 6,759 5,454 Inventory 1,327 1,365 1,425 1,382 1,180

Prepaid Expenses 4,408 3,684 3,678 3,845 2,853 Prepaid Expenses 0 0 0 0 0

Total Current Assets 21,970 21,910 23,990 31,617 29,646 Total Current Assets 4,402 4,556 4,931 4,863 4,384

Net PPE 21,293 20,377 21,666 22,304 20,268 Net PPE 3,668 3,842 4,083 4,080 3,796

Total Assets 138,354 132,244 139,263 144,266 129,495 Total Assets 12,724 13,394 13,985 13,459 11,958

Liabilities and Equity Liabilities and Equity

Accounts Payable 8,022 7,920 8,777 8,461 8,257 Accounts Payable 1,244 1,290 1,343 1,231 1,110

Accrued Expenses 5,696 4,804 5,161 5,336 4,564 Accrued Expenses 1,694 1,789 1,936 1,798 1,721

Short‐Term Debt 6,987 4,615 7,926 11,299 9,249 Short‐Term Debt 34 54 13 16 4

Total Current Liab. 27,293 24,907 30,037 33,726 29,790 Total Current Liab. 3,716 3,736 4,579 3,946 3,534

Long‐Term Debt 22,033 21,080 19,111 19,811 18,297 Long‐Term Debt 4,432 4,926 4,750 5,646 6,269

Total Liabilities 70,353 68,209 70,554 74,290 66,445 Total Liabilities 10,183 11,004 11,449 12,074 12,002

Preferred Equity 1,234 1,195 1,137 1,111 1,077 Preferred Equity 0 0 0 0 0

Common Stock & APIC 66,413 67,189 67,547 67,920 67,861 Common Stock & APIC 2,069 2,284 2,470 2,702 2,904

Retained Earnings 70,682 75,349 80,197 84,990 84,807 Retained Earnings 15,649 16,953 17,952 18,832 18,861

Treasury Stock (67,278) (69,604) (71,966) (75,805) (77,226) Treasury Stock (12,808) (14,386) (15,633) (16,862) (18,102)

Total Common Equity 66,406 62,244 66,927 68,103 61,342 Total Common Equity 2,375 2,189 2,305 1,145 (299)

Total Equity 68,001 64,035 68,709 69,976 63,050 Total Equity 2,541 2,390 2,536 1,385 (44)

Total Liab. and Equity 138,354 132,244 139,263 144,266 129,495 Total Liab. and Equity 12,724 13,394 13,985 13,459 11,958

Income Statement Highlights

Balance Sheet Highlights

Income Statement Highlights

Balance Sheet Highlights

1. Margins and Profitability PG, Page 2 of 17 Copyright Robert A. Weigand, Ph.D., 2016

PG The Procter & Gamble Company CL Colgate‐Palmolive Co.

Profit Margins 2011 2012 2013 2014 2015 Profit Margins 2011 2012 2013 2014 2015

Gross Profit Margin 50.9% 49.5% 50.1% 49.6% 49.9% Gross Profit Margin 57.6% 58.2% 58.7% 58.7% 58.7%

Operating Profit Margin 19.1% 17.8% 17.6% 19.2% 19.5% Operating Profit Margin 23.1% 23.4% 23.7% 24.0% 24.6%

Net Profit Margin 14.5% 13.1% 14.1% 14.5% 9.2% Net Profit Margin 14.5% 14.5% 12.9% 12.6% 8.6%

Free Cash Flow Margin N/A 11.9% 10.9% 8.7% 18.6% Free Cash Flow Margin N/A 15.2% 14.8% 14.1% 21.0%

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015

Gross Profit Margin Operating Profit Margin

0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 2015


44%

46%

48%

50%

52%

54%

56%

58%

60%

2011 2012 2013 2014 2015

Gross Profit Margin PG CL

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2011 2012 2013 2014 2015

Operating Profit Margin PG CL

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2011 2012 2013 2014 2015

Net Profit Margin PG CL

Gross Profit Margin: Gross profit margin shows gross profit as a percentage of revenue. PG's gross profit is in a steady trend from 2011 to 2015, declining only 1% over the years from 50.9% in 2011 to 49.9% in 2015. PG's stable gross profit margin keep them well above the industry average of 6.41% to Yahoo Finance. Colgate is in an steady uptrend from 2011 to 2015, with an increased from 57.6% to 58.7%. CL is outperforming PG every year, indicating that a greater percentage of revenue is available to flow toward CL's bottom line profits, free cash flow that supports the firms intrinsic value, and back to investors in the form of dividends.

Operating Profit Margin: Operating profit margin illustrates operating profit as a percentage of revenue. PG's operating profit margin is in an uptrend from 2013 to 2015, from 17.6% to 19.5%. CL's Operating Profit Margin increases from 23.1% in 2011 to 24.6% in 2015, despite this slow growth Cogate is still outperforming Procter and Gamble every year. The approximately 2% increase in PG's operating profit margin signals that there is more cash avaliable to flow toward bottom line profits, free cash flow that supports the firm's intrinsic value, and back to the investors in the form of dividends.

Net Profit Margin: Net profit margin expresses net income as a percentage of total revenues. PG shows a recent downward trend in Net Profit Margin from 14.5% in 2014 to 9.2% in 2015, where revenues are growing faster than net income. CL's Net Profit Margin shows a downtrend from 14.5% in 2012 to 8.6% in 2015. PG outperforms CL from 2013 to 2015. Low 2015 Net Profit Margins for both Procter & Gamble and Colgate indicate profits are not flowing to the bottom line efficiently.

Conclusion: Overall, PG's gross profit margin and operating profit margin are in a recent uptrend while net profit margin are in a downtrend. Growing gross and operating profit margins indicate that gross profit and operating profit are growing faster than revenue; however, a decline in net profit margins indicates revenues are growing faster than net profit and PG is not as efficient at making revenues flow to the bottom line.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2012 2013 2014 2015

Free Cash Flow Margin PG CL



Profitability Ratios 2011 2012 2013 2014 2015 Profitability Ratios 2011 2012 2013 2014 2015

Net Profit Margin 14.5% 13.1% 14.1% 14.5% 9.2% Net Profit Margin 14.5% 14.5% 12.9% 12.6% 8.6%

× Total Asset Turnover 0.6 0.6 0.6 0.6 0.6 × Total Asset Turnover 1.3 1.3 1.2 1.3 1.3

= Return on Assets 8.5% 8.1% 8.1% 8.1% 5.4% = Return on Assets 19.1% 18.5% 16.0% 16.2% 11.6%

× Equity Multiplier 2.0 2.1 2.0 2.1 2.1 × Equity Multiplier 5.0 5.6 5.5 9.7 ‐271.8

= Return on Equity 17.3% 16.8% 16.5% 16.6% 11.2% = Return on Equity 95.7% 103.4% 88.4% 157.4% ‐3145.5%

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015

Return on Assets Return on Equity

‐3500%

‐3000%

‐2500%

‐2000%

‐1500%

‐1000%

‐500%

0%

500%

2011 2012 2013 2014 2015

Return on Assets Return on Equity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2011 2012 2013 2014 2015

Total Asset Turnover PG CL

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013 2014 2015

Return on Assets PG CL

‐3500.0%

‐3000.0%

‐2500.0%

‐2000.0%

‐1500.0%

‐1000.0%

‐500.0%

0.0%

500.0%

2011 2012 2013 2014 2015

Return on Equity PG CL

Total Asset Turnover: The total asset turnover is the percentage of revenue that is generated by total assets. PG total asset turnover is holding steady at 0.6 from 2011 to 2015. CL is in a similar pattern, and remains steady around 1.3 from 2011 through 2015. CL is above PG every year from 2011 to 2015. The steady trend signals that both companies are generating roughly the same level of revenues per dollar of assets each year.

Return on Assets: Return on assets is net income as a percentage of assets. PG's ROA is in a downtrend from 8.5% in 2011, holding steady form 2012 to 2014, until dropping to 5.4% in 2015. This is due to fluctuations in the net profit margin while total asset turnover remains steady. CL's ROA shows a constant downtrend from 19.1% in 2011 to 11.6% in 2015. While CL is in a constant downtrend, they are still outperforming PG each year. CL's performance above PG from 2011 to 2015, shows that CL is generating more net income per dollar of assets.

Return on Equity: Return on equity is net income as a percentage of shareholder's equity. PG's ROE is in a downtrend from 17.3% in 2011 to 11.2% in 2015 due to a decrease in net profit margin affecting the ROA, while total asset turnover and the equity multiplier remain relatively constant. CL's ROE shows a downtrend from 2011 through 2015, with spikes in 2012 and 2014 and outperforms PG every year, except for 2015 when they experience a negative ROE of 3,145.5% due to a ‐271.8 equity multiplier CL's outperformance of PG from 2011 to 2014 illustrates that PG is expressing less dollars of profit relative to the capital contributions by shareholders than CL almost every year.

Conclusion: Overall, PG's return on assets and return on equity are in a downtrend from 2011 to 2015 due to a decrease in net income. With a decreasing net profit margin and a low total asset turnover, the decrease of ROA and ROE signals that PG is generating less net income per dollar of assets and equity.

‐300.0

‐250.0

‐200.0

‐150.0

‐100.0

‐50.0

0.0

50.0

2011 2012 2013 2014 2015

Equity Multiplier PG CL



Multiples and Yields 2011 2012 2013 2014 2015 Multiples and Yields 2011 2012 2013 2014 2015

Price/Earnings 15.1 15.7 18.7 18.4 30.2 Price/Earnings 18.6 20.1 27.1 29.0 43.4

Price/Book 1.3 1.3 1.5 1.5 1.6 Price/Book 3.5 3.7 4.3 4.7 5.0

Price/Free Cash Flow N/A 17.2 24.3 30.6 15.0 Price/Free Cash Flow N/A 19.2 23.5 26.1 17.9

Earnings Yield 6.6% 6.4% 5.4% 5.4% 3.3% Earnings Yield 5.4% 5.0% 3.7% 3.4% 2.3%

Dividend Yield 3.1% 3.5% 3.0% 3.1% 3.3% Dividend Yield 2.5% 2.3% 2.0% 2.1% 2.3%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2012 2013 2014 2015


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2012 2013 2014 2015

Earnings Yield Dividend Yield

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2012 2013 2014 2015

Earnings Yield PG CL

Price to earnings ratio: The price to earnings ratio expresses the stock price as a multiple of its earnings over the past 12 trailing months. Proctor and Gable's P/E ratio is increasing, throughout all years, the P/E ratio is 15.1in 2011 increasing to 30.2 in 2015, is outside the reasonable range of 12‐18. CL's P/E ratio is also increasing from 20.1 in 2012 to 43.4 in 2015 as EPS declines. The rise in PG's and CL's P/E ratio can be attributed to decreasing earnings per share indicating potential concern for possible overvaluation.

Earnings yield: The earnings yield, the reciprocal of its P/E ratio, expresses EPS as a percentage of the stock price. Proctor and Gable's earnings yield is in a downward trend from 6.6% in 2011 and dropping out at .3.3% in 2015 as the stock price grows faster than its earnings. Colgate's earnings yield is in a downward trend from 5.0% in 2011 to 2.3% in 2015 the stock price grows faster than earnings. Proctor and Gable's and Colgate's lower earnings yield indicate that the market is pricing their stock more expensive relative to its earnings.

Dividend yield: Dividend yield expresses the annual dividend per share as a percentage of the stock price. Proctor and Gable's dividend yield remains stable from 3.5% in 2011 to 3.3% in 2015, the small decrease shows that the market is pricing the stock cheaper relative to its dividend per share as dividends grows faster than the stock price. The stable dividend yield, over all years, ranging from 3‐3.5% for Proctor and Gable which shows strong commitment to paying dividends. Colgate's dividend yield is also stable ranging from 2 ‐2.5%. Both company's exceed our 2% benchmark showing both as strong dividend payers.

Conclusion: Proctor and Gable's P/E ratio is above the reasonable range of 12‐18 were earnings decline faster that the stock price indicating concerns about a possible overvaluation. Proctor and Gable's dividend yield is stable at approximately 3% which is above our benchmark of 2% for strong dividend payers.

0.0

10.0

20.0

30.0

40.0

50.0

2012 2013 2014 2015


0.0

10.0

20.0

30.0

40.0

50.0

2012 2013 2014 2015

Price to Earnings PG CL

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2012 2013 2014 2015


0.0

1.0

2.0

3.0

4.0

5.0

6.0

2012 2013 2014 2015

Price to Book PG CL

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2012 2013 2014 2015

Price to Free Cash Flow PG CL

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2012 2013 2014 2015

Dividend Yield PG CL

2. Relative Valuation and Debt PG, Page 5 of 17 Copyright Robert A. Weigand, Ph.D., 2016


Liquidity and Debt 2011 2012 2013 2014 2015 Liquidity and Debt 2011 2012 2013 2014 2015

Current Ratio 0.80 0.88 0.80 0.94 1.00 Current Ratio 1.18 1.22 1.08 1.23 1.24

Quick Ratio 0.53 0.61 0.57 0.74 0.81 Quick Ratio 0.83 0.85 0.77 0.88 0.91

Days Sales Outstanding 28.24 27.01 29.65 28.95 23.26 Days Sales Outstanding 36.53 35.63 34.28 33.68 32.48

Inventory Turnover 10.99 12.20 11.60 11.91 13.99 Inventory Turnover 12.61 12.52 12.22 12.50 13.59

Total Debt to Assets 21.0% 19.4% 19.4% 21.6% 21.3% Total Debt to Assets 35.1% 37.2% 34.1% 42.1% 52.5%

Long‐Term Debt to Equity 33.2% 33.9% 28.6% 29.1% 29.8% Long‐Term Debt to Equity 186.6% 225.0% 206.1% 493.1% ‐2096.7%

Times Interest Earned 18.65 19.00 21.18 21.83 23.76 Times Interest Earned 66.62 49.90 35.52 31.90 29.60

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2011 2012 2013 2014 2015

Current Ratio Quick Ratio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2011 2012 2013 2014 2015

Current Ratio Quick Ratio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2011 2012 2013 2014 2015

Current Ratio PG CL

Current Ratio: The current ratio measures the firm’s ability to meet short term obligations. Proctor and Gable's current ratio has been increasing from 2011 to 2015 from .80 to 1.0. Colgate's has been in an uptrend from 2013 to 2015, and has been higher than Proctor and Gable's over this period. Proctor and Gable is below 1.0 from 2011 to 2014 before increasing to 1.0 in 2015 meaning that the company might not be able to meet their short term obligations historically, while historically Colgate has been above the 1.0 mark and is able to meet short term obligations.

Total Debt to Assets: Total debt to assets is the percentage of total debt to total assets. Proctor and Gable's total debt to assets have been stable from 20.1% in 2012 to 21.6% in 2014, having a lower ratio than Colegate's over all years. Proctor and Gable's lower ratio expresses that Proctor and Gable is incurring less debt to finance the acquired assets.

Conclusion: Both Proctor and Gable and Colegate are maintaining a current ratio above or arround 1.0 which illustrates that both companies may be able to meet their short term obligations in 2015. Proctor and Gable's stable total debt to assets can be attributed to their lower debt to fund acquisitions.

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015

Total Debt to Assets PG CL

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2011 2012 2013 2014 2015

Days Sales Outstanding Inventory Turnover

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2011 2012 2013 2014 2015

Days Sales Outstanding Inventory Turnover

0%

5%

10%

15%

20%

25%

30%

35%

40%

2011 2012 2013 2014 2015

Total Debt to Assets Long-Term Debt to Equity

‐2500.0%

‐2000.0%

‐1500.0%

‐1000.0%

‐500.0%

0.0%

500.0%

1000.0%

2011 2012 2013 2014 2015

Total Debt to Assets Long-Term Debt to Equity

‐2500%

‐2000%

‐1500%

‐1000%

‐500%

0%

500%

1000%

2011 2012 2013 2014 2015

Long-Term Debt to Equity PG CL

2. Relative Valuation and Debt PG, Page 6 of 17 Copyright Robert A. Weigand, Ph.D., 2016


Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2011 2012 2013 2014 2015

Total Cash and ST Investments 2,768 4,436 5,947 10,686 11,612 Total Cash and ST Investments 952 1,003 1,136 1,290 1,072

+ Receivables 6,275 6,068 6,508 6,386 4,861 + Receivables 1,675 1,668 1,636 1,594 1,427

+ Inventory 7,379 6,721 6,909 6,759 5,454 + Inventory 1,327 1,365 1,425 1,382 1,180

− Accounts Payable 8,022 7,920 8,777 8,461 8,257 − Accounts Payable 1,244 1,290 1,343 1,231 1,110

− Accrued Expenses 5,696 4,804 5,161 5,336 4,564 − Accrued Expenses 1,694 1,789 1,936 1,798 1,721

= Net Oper. Working Capital 2,704 4,501 5,426 10,034 9,106 = Net Oper. Working Capital 1,016 957 918 1,237 848

+ Net Property, Plant & Equip. 21,293 20,377 21,666 22,304 20,268 + Net Property, Plant & Equip. 3,668 3,842 4,083 4,080 3,796

= Total Invested Capital 23,997 24,878 27,092 32,338 29,374 = Total Invested Capital 4,684 4,799 5,001 5,317 4,644

÷ Total Weighted Shares 2,804 2,751 2,743 2,720 2,712 ÷ Total Weighted Shares 977 952 931 915 902

= Total Invested Capital/Share $8.56 $9.04 $9.88 $11.89 $10.83 = Total Invested Capital/Share $4.80 $5.04 $5.37 $5.81 $5.15


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2011 2012 2013 2014 2015

Operating Income (EBIT) 15,495 14,611 14,125 15,497 14,873 Operating Income (EBIT) 3,864 3,992 4,120 4,147 3,937

× (1−Effective Tax Rate) 22.0% 27.0% 22.8% 21.1% 24.6% × (1−Effective Tax Rate) 32.6% 32.1% 32.4% 33.8% 31.6%

= Net Oper. Profit After Tax 12,086 10,671 10,911 12,234 11,212 = Net Oper. Profit After Tax 2,605 2,711 2,785 2,745 2,694

− ∆ Total Invested Capital N/A 881 2,214 5,246 (2,964) − ∆ Total Invested Capital N/A 115 202 316 (673)

= Free Cash Flow N/A 9,790 8,697 6,988 14,176 = Free Cash Flow N/A 2,596 2,583 2,429 3,367

NOPAT per Share $4.31 $3.88 $3.98 $4.50 $4.13 NOPAT per Share $2.67 $2.85 $2.99 $3.00 $2.99

Free Cash Flow per Share N/A $3.56 $3.17 $2.57 $5.23 Free Cash Flow per Share N/A $2.73 $2.78 $2.65 $3.73

$0

$5,000

$10,000

$15,000

$20,000

$25,000

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$35,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

2011 2012 2013 2014 2015

Total Invested Capital per Share PG CL

$0

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$12,000

$14,000

$16,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

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2012 2013 2014 2015

NOPAT per Share PG CL

$0

$500

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$3,500

$4,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

Total invested capital: PG's total invested capital is showing an uptrend from 23,997 in 2011 to 32,338 in 2014. PG's total invested capital exceeds CL's from 2011 to 2015, where PG had a substantial increase in NOWC from $2,704 in 2011 to $9,106 in 2016 exceeding CL’s NOWC that decreases from $1,016 in 2011 to $848 in 2015.NOPAT/share: PG's NOPAT/share has been in a upward trend from $3.88 in 2012 to $4.50 in 2014 until 2015, where NOPAT deceases to $4.13 due to a lower EBIT and a higher effective tax rate. CL's NOPAT/share increases from $2.85 in 2011 to $2.99 2015. The increase in NOPAT/share for PG in 2012 to 2014 can be attributed to a decrease in their tax rate from 27% in 2012 to 21.1% in 2014 showing an increase in tax efficiency, but the effective tax rate increases again to 24.6% in 2015, while CL has a higher tax rates every year above 30% showing that PG's tax advantage.FCF/Share: PG's FCF/share shows a downtrend from $3.56 2012 to $2.57 in 2014 where the change in total invested capital is growing faster than NOPAT and increases to $5.23 in 2015, where PG experience decrease in NOPAT and at the same time a negative change in total invested capital. CL's free cash flow/share increases from $2.73 in 2012 to $3.73 in 2015. PG's FCF/share is outperforming CL every year except for 2014. Even with the decrease in NOPAT, PG's 2015 increase in free cash flow/share signals that there is more free NOPAT to pay out to investors than CLbecause less has been spent on acquiring new assets and since FCF/share is the major driver of per share valuation PG earns a win in this category.

3. Value Creation and DCF Model PG, Page 7 of 17 Copyright Robert A. Weigand, Ph.D., 2016


Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted %

Equity Capitalization $212,163 88.1% 6.784% 5.978% Equity Capitalization $60,105 90.5% 5.197% 4.706%

+ Total Debt $27,546 11.4% 5.000% 0.431% + Total Debt $6,273 9.5% 5.000% 0.323%

+ Preferred Stock $1,077 0.4% 0.000% 0.000% + Preferred Stock $0 0.0% 0.000% 0.000%

= Value of All Securities $240,786 100.0% = Value of All Securities $66,378 100.0%

Effective Tax Rate 24.62% Alternative RF Rate: Effective Tax Rate 31.58% Alternative RF Rate:

Risk‐Free Rate 1.884% 1.884% Risk‐Free Rate 1.884% 1.884%

Beta (5‐Yr) 0.700 Alternative Beta: 0.47465 Beta (5‐Yr) 0.473 Alternative Beta: 0.47325

Market Risk Premium 7.0% 0.700 Market Risk Premium 7.0%

CAPM Cost of Equity 6.784% CAPM Cost of Equity 5.197%

Weighted Average Cost of Capital: 6.409% Weighted Average Cost of Capital: 5.029%

6.409% 6.409% 6.409% 6.409% 6.409%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2011 2012 2013 2014 2015

Return on Invested Capital 50.4% 42.9% 40.3% 37.8% 38.2% Return on Invested Capital 55.6% 56.5% 55.7% 51.6% 58.0%

Economic Value‐Added 10,549 9,077 9,175 10,161 9,329 Economic Value‐Added 2,369 2,470 2,534 2,478 2,460

Market Valued‐Added 111,844 106,273 144,249 145,646 150,821 Market Valued‐Added 42,744 47,577 58,392 62,171 60,404

EVA per Share $3.76 $3.30 $3.35 $3.74 $3.44 EVA per Share $2.43 $2.59 $2.72 $2.71 $2.73

MVA per Share $39.89 $38.63 $52.59 $53.55 $55.62 MVA per Share $43.76 $49.97 $62.73 $67.94 $66.95

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EVA per Share PG CL

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2011 2012 2013 2014 2015

Economic Value-Added Market Valued-Added

ROIC: Return on invested capital measures how much NOPAT a firm generates per dollar of invested capital. PG experiences an downward trend in ROIC from 50.4% in 2011 to 38.2% in 2015. CL's ROIC increases from 55.6% in 2011 to 58% in 2015, CL outperforms PG from 2011 to 2015 generating more NOPAT per dollar of total invested capital. PG is experiencing a decrease in how much NOPAT has been generated per dollar of invested capital. Even with a decrease, PG's ROIC beats the WACC from 2011 to 2015 meaning PG is still in a position to generate value.

EVA/share: EVA/share measures how much economic value a firm has created on a year‐by‐year basis per share. PG's EVA/share decreases from $3.76 in 2011 to $3.44 in 2015, showing that NOPAT PG generates is decreasing faster than the cost of capital. CL's EVA per share is on a upward trend from $2.43 to $2.73, signaling more economic profit is being created on a per share basis. To conclude, even with PG's EVA decrease in 2015 where less economic profit has been created due to a lower NOPAT in 2015, PG is still outperforming CL in this category from 2011 to 2015.

Conclusion: The Beta has been adjusted to .7 to stress out the model and allow for mean reversion. With a beta closer to the mean of .7, a WACC of 6.409%, a decrease in total invested capital; PG's EVA/share decreases from $3.76 to $3.44 showing how much economic profit was reduce in 2015. The reduction in value creation is confirmed by the ROIC‐WACC spread where PG's ROIC decrease from 50.4% in 2011 to 38.2% above the 6.409% WACC.

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2011 2012 2013 2014 2015

Return on Invested Capital PG CL

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2011 2012 2013 2014 2015

Return on Invested Capital Return on Equity

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2011 2012 2013 2014 2015

Return on Invested Capital Return on Equity


Long‐Term Growth Rate: Long‐Term Growth Rate:


Intrinsic Value Model 2011 2012 2013 2014 2015 Intrinsic Value Model 2011 2012 2013 2014 2015

PV of Future FCFs 206,269 209,698 214,440 221,195 221,195 PV of Future FCFs 64,692 65,349 66,052 66,944 66,944

+ Value of Non‐Oper. Assets 2,768 4,436 5,947 10,686 11,612 + Value of Non‐Oper. Assets 950 1,000 1,135 1,289 1,072

= Total Intrinsic Firm Value 209,037 214,134 220,387 231,881 232,807 = Total Intrinsic Firm Value 65,642 66,349 67,187 68,233 68,016

− Total Debt 29,020 25,695 27,037 31,110 27,546 − Total Debt 4,466 4,980 4,763 5,662 6,273

= Intrinsic Value of Equity 180,017 188,439 193,350 200,771 205,261 = Intrinsic Value of Equity 61,176 61,369 62,424 62,571 61,743

÷ Total Weighted Shares 2,804 2,751 2,743 2,720 2,712 ÷ Total Weighted Shares 977 952 931 915 902

= Per Share Intrinsic Value $64.20 $68.49 $70.49 $73.82 $75.69 = Per Share Intrinsic Value $62.64 $64.46 $67.07 $68.38 $68.44

vs. Year‐End Stock Price $63.57 $61.25 $76.99 $78.59 $78.24 vs. Year‐End Stock Price $46.20 $52.27 $65.21 $69.19 $66.62

Over (Under) Valuation/Share ($0.63) ($7.24) $6.50 $4.77 $2.55 Over (Under) Valuation/Share ($16.44) ($12.19) ($1.86) $0.81 ($1.82)

% Over (Under) Valued ‐1.0% ‐10.6% 9.2% 6.5% 3.4% % Over (Under) Valued ‐26.2% ‐18.9% ‐2.8% 1.2% ‐2.7%

$0$10$20$30$40$50$60$70$80$90

2011 2012 2013 2014 2015

Year-End Stock Price Per Share Intrinsic Value

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2011 2012 2013 2014 2015


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2011 2012 2013 2014 2015

MVA per Share PG CL

MVA/share: MVA/share measures value creation over the entire life time of the firm on a per share basis. PG's MVA/share is in a upward trend from $39.89 in 2011 to $55.62 in 2015. CL is in a upward trend from $43.76 in 2011 to $66.95 in 2015. CL has a higher MVA/share than PG, expressing a higher value of capital contributions to the firm by shareholders. Both firms are in a upward trend showing how genuine value creation increases on a per share basis from 2011 to 2015.

ROIC vs. WACC: PG's ROIC is on a decreasing trend which is closing the gap between the ROIC and WACC, that can be attributed to the increases in total invested capital growing faster than NOPAT. The diminishing gap between ROIC and WACC signals that the firm is decreasing its ability to generate economic profit on its investments, where in 2015 reachit's lowest point at 38.2%, but PG's ROIC is still above the WACC showing that is still able to generate economic profit.

Conclusion: PG's MVA per share increase expresses how genuine value creation is created in 2015. NOPAT decreasing faster than total invested capital in 2015 caused a lower return on the invested capital that decreased the ROIC‐WACC spread showing a decrease in PG's ability to generate economic profit.

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2011 2012 2013 2014 2015

Return on Invested Capital WACC



Piotroski Financial Fitness Scorecard 2012 2013 2014 2015 Piotroski Financial Fitness Scorecard 2012 2013 2014 2015

Positive Net Income 1 1 1 1 Positive Net Income 1 1 1 1

Positive Free Cash Flow 1 1 1 1 Positive Free Cash Flow 1 1 1 1

Growing ROA (% change NI > % change TA) 0 0 0 0 Growing ROA (% change NI > % change TA) 0 0 1 0

Earnings Quality (Operating Income > Net Income) 1 1 1 1 Earnings Quality (Operating Income > Net Income) 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 0 1 0 1 Total Assets Growing Faster Than Total Liabilities 0 1 0 0

Increasing Liquidity (Current Ratio) 1 0 1 1 Increasing Liquidity (Current Ratio) 1 0 1 1

% Change Shares Outstanding < +2.0% 1 1 1 1 % Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1

Expanding Operating Margin 0 0 1 1 Expanding Operating Margin 1 1 1 1

Asset Turnover (% change sales > % change assets) 1 0 0 1 Asset Turnover (% change sales > % change assets) 0 0 1 1

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 0 0 0 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1

Piotroski Score (max = 10) 6 5 6 8 Piotroski Score (max = 10) 7 7 9 8


Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015 Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015

(Current Assets‐Current Liabilities)/Total Assets ‐0.0272 ‐0.0521 ‐0.0175 ‐0.0013 ## (Current Assets‐Current Liabilities)/Total Assets 0.0735 0.0302 0.0818 0.0853

Retained Earnings/Total Assets 0.6837 0.6910 0.7069 0.7859 ## Retained Earnings/Total Assets 1.5189 1.5404 1.6791 1.8927

Earnings Before Interest & Tax/Total Assets 0.3646 0.3347 0.3545 0.3790 ## Earnings Before Interest & Tax/Total Assets 0.9835 0.9722 1.0168 1.0865

Market Value Equity/Total Liabilities 1.4824 1.7959 1.7263 1.9158 ## Market Value Equity/Total Liabilities 2.7135 3.1809 3.1464 3.0047

Sales/Total Assets 0.6195 0.5747 0.5575 0.5885 ## Sales/Total Assets 1.2743 1.2444 1.2824 1.3395

Altman Score 3.12 3.34 3.33 3.67 Altman Score 6.56 6.97 7.21 7.41

Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23


30‐Jun‐11 30‐Jun‐12 30‐Jun‐13 30‐Jun‐14 30‐Jun‐15

The Procter & Gamble Company PG Consumer Staples Report Date:

Average

2011 2012 2013 2014 2015 2011 ‐ 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue 81,104 82,006 80,116 80,510 76,279 Total Revenue 65,142 66,054 67,970 69,329 70,023

% growth N/A 1.1% ‐2.3% 0.5% ‐5.3% ‐1.5% % growth ‐14.6% 1.4% 2.9% 2.0% 1.0%

Gross Profit 41,245 40,595 40,125 39,899 38,031 Gross Profit 32,506 32,697 33,305 33,625 33,611

Gross Margin (% of sales) 50.9% 49.5% 50.1% 49.6% 49.9% 50.0% Gross Margin (% of sales) 49.9% 49.5% 49.0% 48.5% 48.0%


Operating Margin (% of sales) 19.1% 17.8% 17.6% 19.2% 19.5% 18.7% Operating Margin (% of sales) 20.0% 20.5% 21.0% 21.0% 21.0%

Earnings Before Tax 14,997 12,528 14,179 14,337 11,846

Income Tax Expense 3,299 3,378 3,226 3,019 2,916 Forecasted Effective Tax Rate 24.0% 24.0% 24.0% 24.0% 24.0%

Effective Tax Rate 22.0% 27.0% 22.8% 21.1% 24.6% 23.5% Effective Tax Rate Adjustment 24.0% 24.0% 24.0% 24.0% 24.0%

Net Income 11,797 10,756 11,312 11,643 7,036 Net Income 9,771 9,908 10,195 10,399 10,503

Net Margin (% of sales) 14.5% 13.1% 14.1% 14.5% 9.2% 13.1% Net Margin (% of sales) 15.0% 15.0% 15.0% 15.0% 15.0%

Total Common Shares 2,804 2,751 2,743 2,720 2,712 Total Common Shares 2,690 2,671 2,655 2,642 2,631

% growth N/A ‐1.9% ‐0.3% ‐0.8% ‐0.3% ‐0.8% % growth ‐0.8% ‐0.7% ‐0.6% ‐0.5% ‐0.4%

Earnings per Share $4.21 $3.91 $4.12 $4.28 $2.59 Earnings per Share $3.63 $3.71 $3.84 $3.94 $3.99

Dividends per Share $1.97 $2.14 $2.29 $2.45 $2.59 Dividends per Share $2.68 $2.77 $2.85 $2.93 $3.01

% growth N/A 8.6% 7.0% 6.9% 5.9% 7.1% % growth 3.5% 3.0% 3.0% 3.0% 2.5%

Year‐end Stock Price $63.57 $61.25 $76.99 $78.59 $78.24996 997 998 999 1000 996 997 998 999 1000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash + ST Investments 2,768 4,436 5,947 10,686 11,612 Cash + ST Investments 9,771 9,908 10,195 10,399 10,503

% of sales 3.4% 5.4% 7.4% 13.3% 15.2% 8.9% % of sales 15.0% 15.0% 15.0% 15.0% 15.0%

Total Receivables 6,275 6,068 6,508 6,386 4,861 Total Receivables 4,894 4,963 5,106 5,209 5,261

% of sales 7.7% 7.4% 8.1% 7.9% 6.4% 7.5% % of sales

Inventory 7,379 6,721 6,909 6,759 5,454 Inventory 5,402 5,478 5,636 5,749 5,807

% of sales 9.1% 8.2% 8.6% 8.4% 7.2% 8.3% % of sales

Net PPE 21,293 20,377 21,666 22,304 20,268 Net PPE 18,891 19,156 19,711 20,105 20,307

% of sales 26.3% 24.8% 27.0% 27.7% 26.6% 26.5% % of sales 29.0% 29.0% 29.0% 29.0% 29.0%

Total Assets 138,354 132,244 139,263 144,266 129,495 Total Assets 130,285 132,109 135,940 138,658 140,045

% of sales 170.6% 161.3% 173.8% 179.2% 169.8% 170.9% % of sales 200.0% 200.0% 200.0% 200.0% 200.0%

Payables and Accruals 13,718 12,724 13,938 13,797 12,821 Payables and Accruals 10,914 11,067 11,388 11,616 11,732

% of sales 16.9% 15.5% 17.4% 17.1% 16.8% 16.8% % of sales

ST Debt plus LT Debt 29,020 25,695 27,037 31,110 27,546 ST Debt plus LT Debt 23,451 24,110 25,149 25,998 26,609

% of sales 35.8% 31.3% 33.7% 38.6% 36.1% 35.1% % of sales 36.0% 36.5% 37.0% 37.5% 38.0%

Total Equity 68,001 64,035 68,709 69,976 63,050 Total Equity 63,839 63,412 63,892 63,783 63,020

% of sales 83.8% 78.1% 85.8% 86.9% 82.7% 83.5% % of sales 98.0% 96.0% 94.0% 92.0% 90.0%

April 18, 2016

Forecasted Income Statement Drivers

Forecasted Balance Sheet Drivers

Historical Income Statement Drivers

Historical Balance Sheet Drivers

Total Revenue Growth: The S&P is projecting total revenue decline of 14.67% in 2016, growing back again to 1.37% in 2017, and 2.99% in 2018. The model above takes a conservative approach with forecasting total revenue decline of 14.6% in 2016, increasing to a growth of 1.4% in 2017, 2.9% in 2018, and tapering down the long term perpetual growth rate to 1% in 2020 which reflects a margin of safety. Gross Profit Margin: S&P analysts are predicting a gross margin of 49.96% in 2016, 50.66% in 2017, and 51.02% in 2018; yet the forecast takes a conservative approach. The starting point of 49.9% is tapered down to 48%. EBIT: Analyst at S&P predicted 21.33% operating margin in 2016, taking a conservative stand point and margin of safety it steadily increases from 20% in 2016 to 21% in 2020. E‐Tax rate: S&P CIQ estimate a 23.76% effective tax rate in 2016 to 23.32% in 2020. The forecast assumes a constant 24% tax rate from 2016 to 2020. Net Income: Analyst are forecasting an increase in net income (S&P Capital IQ) from 15.75% in 2016, 16.35% in 2017, and 16.69% in 2018; however, the model reflects a more conservative forecast and shows it constant at 15% from 2016 to 2020. Total Common Shares: PG's 10‐k states that they are taking place in a repurchasing program, however there is no specified time frame for this. Due to the lack of a time frame the model reflects PG slowly repurchasing common stock, and decreasing over the years. Dividend/share: Analyst's reports states that PG will increase their dividend in 2016 and then increase the dividend incrementally over the following years. S&P is forecasting DPS of 2.78 in 2016, 2.84 in 2017, 3.02 in 2018, 3.09 in 2019, and in 3.3 by 2020. There is a margin of safety and the model is conservative due to their past history of paying dividends starting with a 3.5% growth is tapered down to 2.5%. Cash: . Due to a decrease in revenues in 2016, repurchasing program, Cash remains constant at 15% above it's historical average of 8.7% from 2016 to 2020. The cash level of $9,611 in 2016 is below the 2015 level of 11,612 due to the assumption that PG is going to finance the repurchase program with a combination of cash flows from operations and issuing debt.Net PPE: Due to no acquisitions expected and since two quarters are already reported showing a decrease to $18,910 in Net PP&E, it is forecasted that Net PPE will remain constant at 29% as a percentage of sales from 2016 to 2020. Total Assets: : Due to no acquisitions expected and since two quarters are already reported showing $129,143 in total assets, the forecasted total assets remains constant at 200% as a percentage of sales.Debt: The forecast shows total debt of 36% in 2016 increasing to 38% as PG incurrs more debt due to its repurchase program and for the investments in the sustainability program. Total equity: The forecast shows a decrease in equity starting at 98% and is tapered down to 90% respectively due to PG's intentions of the repurchase program in the next 5 years.

4. Forecasting and Valuation PG, Page 11 of 17 Copyright Robert A. Weigand, Ph.D., 2016

The Procter & Gamble Company The Procter & Gamble Company

Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2016E 2017E 2018E 2019E 2020E

Cash and ST Investments 2,768 4,436 5,947 10,686 11,612 Cash and ST Investments 9,771 9,908 10,195 10,399 10,503

+ Receivables 6,275 6,068 6,508 6,386 4,861 + Receivable 4,894 4,963 5,106 5,209 5,261

+ Inventory 7,379 6,721 6,909 6,759 5,454 + Inventory 5,402 5,478 5,636 5,749 5,807

− Payables and Accruals 13,718 12,724 13,938 13,797 12,821 − Payables and Accruals 10,914 11,067 11,388 11,616 11,732

= Net Oper. Working Capital 2,704 4,501 5,426 10,034 9,106 = Net Oper. Working Capital 9,153 9,281 9,550 9,741 9,839

+ Net Property, Plant & Equip. 21,293 20,377 21,666 22,304 20,268 + Net Property, Plant & Equip. 18,891 19,156 19,711 20,105 20,307

= Total Invested Capital 23,997 24,878 27,092 32,338 29,374 = Total Invested Capital 28,044 28,437 29,262 29,847 30,145

÷ Total Common Shares 2,804 2,751 2,743 2,720 2,712 ÷ Total Common Shares 2,690 2,671 2,655 2,642 2,631

= Total Invested Capital/Share $8.56 $9.04 $9.88 $11.89 $10.83 = Total Invested Capital/Share $10.43 $10.65 $11.02 $11.30 $11.46


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E


× (1−Effective Tax Rate) 22.0% 27.0% 22.8% 21.1% 24.6% × (1−Effective Tax Rate) 24.0% 24.0% 24.0% 24.0% 24.0%

= Net Oper. Profit After Tax 12,086 10,671 10,911 12,234 11,212 = Net Oper. Profit After Tax 9,902 10,291 10,848 11,065 11,176

− ∆ Total Invested Capital N/A 881 2,214 5,246 (2,964) − ∆ Total Invested Capital (1,330) 393 825 585 298

= Free Cash Flow N/A 9,790 8,697 6,988 14,176 = Free Cash Flow 11,231 9,899 10,023 10,480 10,877

NOPAT per Share $4.31 $3.88 $3.98 $4.50 $4.13 NOPAT per Share $3.68 $3.85 $4.09 $4.19 $4.25

Free Cash Flow per Share N/A $3.56 $3.17 $2.57 $5.23 Free Cash Flow per Share $4.18 $3.71 $3.78 $3.97 $4.13

Historical Performance Forecasted Performance


FCF/Share: PG FCF shows an downward trend from 2016 to 2020 due to decreasing EBIT and NOPAT. The decreasing free cash flow/share signals that there is less free NOPAT to pay out to investors and FCF that supports the firm's intrinsic value.

ROIC: The forecasted ROIC greater than the WACC of 5.822% illustrates that PG is still able to create value, but the forecasted ROIC is increasing over time from 35.3% in 2016 to 37.1%in 2020 signaling a relatively small increase in their ability to generate profit on investments.

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Net Profit Margin Effective Tax Rate (right axis)

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Total Invested Capital Net Operating Working Capital


The Procter & Gamble Company

Cost of Capital 2015 Weight % Cost Weighted % The Procter & Gamble Company

Equity Capitalization $212,163 88.5% 6.084% 5.385%

+ Total Debt $27,546 11.5% 5.000% 0.437% Year 2016E 2017E 2018E 2019E 2020E

= Value of All Securities $239,709 100.0% Dividend Growth Rates 3.5% 3.0% 3.0% 3.0% 2.5%

Expected Future Dividends $2.68 $2.77 $2.85 $2.93 $3.01

Effective Tax Rate 24.00% Alternative RF Rate:

Risk‐Free Rate 1.884% 1.884% PV Dividends 1‐4 $9.69 Dividend Yield 3.2%

Beta (5‐Yr) 0.600 Alternative Beta: 0.47465 PV Perpetual Div. $66.24

Market Risk Premium 7.0% 0.600 Intrinsic Value $75.93 If Purchased For: $83.10

CAPM Cost of Equity 6.084% Current Price $83.10 Expected Return = 3.6%

Weighted Average Cost of Capital: 5.822% ($83.10) $2.68 $2.77 $2.85 $86.83 $83.895.822% 5.822% 5.822% 5.822% 5.822% 5.822% 5.822% 5.822% 5.822% 5.822%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E

Return on Invested Capital 50.4% 42.9% 40.3% 37.8% 38.2% Return on Invested Capital 35.3% 36.2% 37.1% 37.1% 37.1%

Economic Value‐Added 10,689 9,223 9,334 10,351 9,502 Economic Value‐Added 8,269 8,636 9,145 9,327 9,421

Market Valued‐Added 110,249 104,482 142,467 143,773 149,113 Market Valued‐Added 159,700 142,673 144,242 146,213 148,725

EVA per Share $3.81 $3.35 $3.40 $3.81 $3.50 EVA per Share $3.07 $3.23 $3.44 $3.53 $3.58

MVA per Share $39.32 $37.98 $51.94 $52.86 $54.99 MVA per Share $59.37 $53.41 $54.33 $55.34 $56.52

Perpetual Growth Rate: 1.0%


DCF Intrinsic Value Model 2011 2012 2013 2014 2015 DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E

PV of Future FCFs 206,604 208,841 212,301 217,673 216,169 PV of Future FCFs 217,522 220,286 223,087 225,595 227,851

+ Cash and ST Investments 2,768 4,436 5,947 10,686 11,612 + Cash and ST Investments 9,771 9,908 10,195 10,399 10,503

= Total Intrinsic Firm Value 209,372 213,277 218,248 228,359 227,781 = Total Intrinsic Firm Value 227,293 230,195 233,283 235,994 238,354

− Total Debt 29,020 25,695 27,037 31,110 27,546 − Total Debt 23,451 24,110 25,149 25,998 26,609

= Intrinsic Value of Equity 180,352 187,582 191,211 197,249 200,235 = Intrinsic Value of Equity 203,842 206,085 208,134 209,996 211,745

÷ Total Common Shares 2,804 2,751 2,743 2,720 2,712 ÷ Total Common Shares 2,690 2,671 2,655 2,642 2,631

= Per Share Intrinsic Value $64.32 $68.18 $69.71 $72.52 $73.84 = Per Share Intrinsic Value $75.78 $77.15 $78.39 $79.49 $80.47

vs. Year‐End Stock Price $63.57 $61.25 $76.99 $78.59 $78.24 vs. Most Recent Stock Price $83.10

Over (Under) Valuation/Share ($0.75) ($6.93) $7.28 $6.07 $4.40 Over (Under) Valuation/Share $7.32

% Over (Under) Valued ‐1.2% ‐10.2% 10.4% 8.4% 6.0% % Over (Under) Valued 9.7%

Forecasted Performance


Dividend Discount Valuation Model

Historical Performance

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EVA MVA (right axis)

EVA/Share: EVA per share is decreasing from $3.5 in 2015 to 3.07 2016, where from 2017 to 2020 increases from $3.23 to $3.58 respectively based on the forecast. EVA/share futureupward trend is showing that NOPAT PG generates is increasing faster than the cost of capital signaling more economic profit is expected to be created on a per share basis.Intrinsic Value: Intrinsic value over the forecasted period appears to be overvalued by 6% in 2015 to 9.7% in 2016. The beta has been adjusted to .6 to stress the model and allow for mean reversion. MVA/Share: MVA per share increases to $59.37 in 2016 expressing ant increase in the value of capital contributions to the firm by shareholders. Genuine value creation increases in the forecasted model from $54.99 in 2015 to $59.37 in 2016, but decreases to $56.52 by 2020.Conclusion: PG's MVA per share increase expresses how genuine value creation is reduced from $59.37 in 2016 to $56.52 in 2020. With Total Invested Capital slowing down, ROIC shows a increase from 35.3% in 2016 to 37.1% in 2020 due to NOPAT growing faster than total invested capital. PG forecasted ROIC‐WACC spread expands from 2016 to 2020 showing

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NOPAT per Share Free Cash Flow per Share



Relative Valuation 2011 2012 2013 2014 2015 Relative Valuation 2016E 2017E 2018E 2019E 2020E

Price to Earnings 15.1 15.7 18.7 18.4 30.2 Price to Earnings 22.9 20.8 20.4 20.2 20.2

Price to Free Cash Flow N/A 17.2 24.3 30.6 15.0 Price to Free Cash Flow 19.9 20.8 20.8 20.0 19.5

Price to Sales 2.2 2.1 2.6 2.7 2.8 Price to Sales 3.4 3.1 3.1 3.0 3.0

Price to Book 1.3 1.3 1.5 1.5 1.6 Price to Book 1.7 1.6 1.5 1.5 1.5

Earnings Yield 6.6% 6.4% 5.4% 5.4% 3.3% Earnings Yield 4.4% 4.8% 4.9% 5.0% 5.0%

Dividend Yield 3.1% 3.5% 3.0% 3.1% 3.3% Dividend Yield 3.2% 3.6% 3.6% 3.7% 3.7%


P/E ratio: PG's 22.9 2016 P/E ratio is above the reasonable range of 12 to 18, but stays slightly above the reasonable range from 2017 to 2020. PG's forecasted 2016 P/E can be a warning sign of volatility when there is no faster expected future growth for PG.

Dividend yield: PG's dividend yield increases in 2016 (above 2%), and it is in an uptrend from 2017 to 2020 remaining above the 2% which is good based on our preference for strong dividend payers, where the forecast shows a dividend yield above 3% from 2016 and 2020.

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ROIC WACC

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Price to Sales Price to Book (right axis)


Documents

PG The Procter Gamble Company Sector: Consumer Staples HOLD · Proctor & Gamble Co. (NYSE:PG) is one of the leading Consumer Products company in the world. With nearly 76 billion