Procter & Gamble (PG) is the quintessential stalwart compounder. It’s a name synonymous with consistency. It’s not flashy, but it’s dependable, delivering low to mid-single-digit revenue growth, expanding margins, and steady free cash flow year after year.
So when shares dipped more than 5% after Q3 2025 earnings, I used it as a buying opportunity. The selloff was triggered by soft 2% organic sales guidance and tariff-related concerns. But in my view, the underlying story hasn’t changed. PG is executing, as it always has.
PG’s competitive edge comes down to scale, brand equity, and disciplined execution. It dominates key categories like oral care, consistently outpaces private labels, and invests in innovation to stay ahead. With sales in 180 countries and a growing e-commerce presence (18% of FY24 revenue, up 9% year-over-year), PG continues to demonstrate its willingness to evolve.
At today’s valuation, PG looks fairly priced for a company that compounds reliably. My thesis is simple: when high-quality companies stumble for short-term reasons, you buy them. And with a modest margin of safety, I believe PG remains a core holding worth owning for long-term investors.
A Transformative Decade (2014–2024)
PG caught my attention back in 2014 when management announced a restructuring. Between 2014 and 2016, management underwent a deliberate transformation, divesting or spinning off more than 100 lower-margin brands including Duracell and Pringles. The strategy was to shed complexity, focus on category leaders with pricing power, and reinvest in daily-use brands.
By 2016, PG had consolidated down to 65 brands including names like Tide, Pampers, and Gillette. The result was a slimmer company with improved financial efficiency. Debt/EBITDA fell from 2.0x to 1.5x, and operating margins expanded from 18.5% in 2016 to 23.66% in 2024.
Meanwhile, revenue steadily grew from $65.3 billion to $84.3 billion (3.2% annual growth) which was driven by pricing, emerging markets, and product innovation. While revenue has only just reached pre-transformation levels again, the changes made have allowed PG to push returns on invested capital (ROIC) past 20% (below 14% previously).
Focus On Productivity
Underpinning these improvements was a focus on productivity. In 2024, PG has targeted $1.5 billion in gross savings in cost of goods sold. This is made possible by AI-driven product systems and supply chain localization. Efforts like these have helped maintain and expand margins even in an inflationary environment.
Importantly, these operational changes translated to market share gains. In FY24, 30 of PG’s top 50 category/country combinations held or grew share. Six of ten product categories gained share globally. These internal metrics demonstrate the enduring strength of PG’s brands.
As investors, the impact of these productivity gains also shows up in how value was returned to shareholders. PG returned over $14B in FY24 alone, including $9B in dividends and $5B in buybacks. Over the past six years, that figure has totaled $96B.
In short, PG’s transformation turned a bloated consumer giant into a lean compounder. One that is able to convert brand equity into high returns and consistent shareholder value.
Current Operations: Five Core Segments
Today, PG operates in five segments, blending higher-margins and steady growth. Here’s a quick look at their performance:
Fabric & Home Care ($29.5B, 36% of FY24 revenue): This segment includes laundry detergents, fabric enhancers, and surface cleaning products. Tide and Ariel remain flagship brands. Tide EVO’s rollout and strong performance in Latin America support long-term growth, despite a flat Q3 2025.
Baby, Feminine & Family Care ($20.3B, 24%): This segment encompasses diapers, feminine hygiene, and family paper products. Key brands like Pampers and Always are navigating input cost inflation and private label pressure. Management aims to regain momentum through product refreshes brands like Pampers and a move toward premium offerings.
Beauty ($15.2B, 18%): This segment covers skin care and personal cleansing products. SK-II’s luxury positioning is driving traction in China, while Olay faces pressure in developed markets.
Health Care ($11.8B, 14%): This segment comprises oral care and personal health. Crest and Oral-B dominate the segment, with Crest 3D White gaining share. The segment’s premium positioning and consumer loyalty support growth and high margins.
Grooming ($6.7B, 8%): This segment includes shaving products and appliances under brands like Gillette, Venus and Braun. Gillette remains the dominant brand globally, though demand has been more volatile. Management has emphasized product innovation and premiumization to regain momentum.
Together, this segmentation balances volume stability with margin expansion, helping PG withstand macro volatility and paving the way for 2025.
2025 Outlook and Growth Drivers
Don’t expect double-digit top-line growth from PG. That is not my thesis and not the point of owning this name. PG provides predictability, pricing power, and margin expansion. Management is guiding to ~2% organic growth in FY25. Estimates are being weighed down by China volatility, tariffs, and sluggish European demand. But there are reasons for optimism.
Key growth drivers include:
- Innovation: P&G’s superiority strategy guides R&D decisions to deliver product innovations; examples being Tide EVO’s compact packaging and Always FlexFoam technology. The company is also utilizing AI-enhanced product testing and India’s AI-driven ordering to reduce costs.
- Pricing Power: Targeted price hikes in Beauty (SK-II) and Health Care (Crest) are holding which is offsetting commodity pressures and supporting margins.
- Emerging Markets: Latin America (15% organic growth) and India are important markets for PG’s growth. Gains in these markets are offsetting slower growth in Europe and North America as well as weakness in developed markets.
- Category Growth Recovery: Management projects 3%–4% organic sales growth by 2027–2028 as categories rebound.
On the Q3 ‘25 conference call, management mentioned that they are sticking with a strategy to invest in innovation and maintain cost discipline. This aggressive approach is in hopes to grow categories even in a softer consumer environment
Valuation and FCF Growth
Based on the narrative discussed thus far, I’m betting that PG’s steady growth continues. And at ~4.26% FY25 FCF yield and 20x EV/EBIT, PG is trading slightly below its long-term averages.
My DCF model assumes 2% revenue growth in FY25, rising to 4.5% by FY28 as macro pressures ease; then, tapering to PG’s historic average. Operating margins remain flat in 2025, and then rise to 25.5% by FY30. Capital spending increases to 4.5% of sales in FY25 before settling at 3.5% of sales, and depreciation stays at 3.5% of sales
With a 6.87% WACC and 2,442 million shares, I arrive at a base case valuation of $157 per share.
Risks to these assumptions include:
- Tariffs: Management estimates $1–$1.5B impact from tariffs could pressure profitability if PG can’t pass through costs or shift sourcing. This is especially true of China.
- Consumer Softness: Slower-than-expected consumption (1% vs. typical 3%–4%) could delay revenue acceleration.
- Commodity and FX Headwinds: Both of these could represent ~$200M in added cost pressure which would weigh on margins.
- Geopolitical Risks: Instability in regions like the Middle East could disrupt operations or demand.
That said, PG’s productivity gains, its increasingly localized supply chain, and strong brand equity help to counter these risks. The model assumes these mitigants hold, supporting ~4% annual FCF growth from $16.16B in FY25 to ~$20B by FY30.
The valuation is sensitive to small changes in key terminal assumptions:
Get Paid While You Wait
I would be remiss not to mention PG’s dividend. The stock currently yields 2.6% ($4.23 per share), projecting $10B dividend payout in FY25 (60.7% payout ratio). With over $16B in forecasted FY25 FCF, the dividend appears secure and leaves room for $6–$7B in buybacks. This would reduce the share count by ~1%.
The combination of buybacks and dividend growth (5%–8% range) adds a meaningful tailwind to long-term returns.
Final Thoughts
Dips like the one after earnings should be perceived as buying opportunities in a name like PG. With high brand equity, durable cash flows, and strong ROIC, PG is built for long-term compounding. Tariff risks and consumer softness matter, but they don’t undermine the core long-term thesis.
PG’s innovation pipeline, disciplined execution, and fortress balance sheet make it one of the most resilient compounders in the consumer staples space. At 20x EBIT and a 4.2% FCF yield, the stock is trading near its historical average; and the DCF model outlines a realistic scenario that hinges on continued operational discipline and risk mitigation. I would argue it is always prudent to buy with a small margin of safety, particularly on pullbacks.
But in a world full of uncertainty, PG delivers consistency, durability, and quiet compounding. With ~4% annual FCF growth, a 2.6% dividend yield, and ~1% share reduction from buybacks, PG offers a path to 7%–8% annualized returns. That’s exactly the kind of business I want to own, and add to, when the market gives me the chance.
Disclosure: I have a long equity position in The Proctor & Gamble Company.
