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3 Things to Watch in Procter & Gamble's Earnings

Demitrios Kalogeropoulos, The Motley Fool

With its announcement of a dividend hike in early April, Procter & Gamble (NYSE: PG) already answered one key question investors had heading into its fiscal third-quarter earnings report. That boost represented the consumer products giant's 63rd consecutive increase, but the 4% raise was a modest disappointment given that sales growth is finally speeding up amid strengthening profitability.

Yet they'll be plenty more for investors to follow in Tuesday's report, so let's dive right in.

A baby plays with toilet paper.

Image source: Getty Images.

Market growth

Growth has been a bright spot for a change in P&G's last few reports. Organic sales, which strips out the impact of brand divestments and currency exchange moves, rose 4% in each of the last two quarters. That represents a multiyear high for the company and translates into modest market share gains in key categories like fabric care and skin care products.

Still, P&G faced some big challenges this past quarter, including in speeding up a struggling shaving segment that's been held back by the Gillette brand. Competitors have been doing all they can to take advantage of the price increases P&G has had to issue across most of its portfolio, too. That's why it will be interesting to see where sales gains land on Tuesday. In late January, CEO David Taylor and his team raised 2019 growth projections to between 2% and 4%, but those numbers represent vastly different market experiences. A 2% uptick would just match the gains management initially targeted, after all, while a 4% spike would imply a sharp acceleration year over year.

Price increases

Rising commodity costs are impacting the entire industry right now, and P&G is no exception. Higher prices for inputs like plastic, paper, and oil are set to cleave $400 million from the business this year, in fact. The faster sales pace is giving P&G latitude to pass along most of these increases to consumers in the form of higher prices, but investors will find out on Tuesday whether that strategy is still working.

Specifically, keep an eye on the balance between sales volumes and prices. Ideally, P&G would prefer its organic growth to come mostly from higher volumes while prices inch up. A price-led sales boost, meanwhile -- especially if volumes are flat or falling -- would suggest weak selling conditions and further profitability struggles ahead. Rival Kimberly-Clark provides a good example of that tough scenario at work. Its profits declined last year as it struggled to pass along price increases.

The updated outlook

The wide growth forecast in place right now means there's plenty of uncertainty around P&G's short-term outlook. The company didn't do much to resolve that doubt with its 4% dividend boost announcement, either, given that the raise merely matched the prior year's modest increase.

If the positive demand momentum from the first half of the year held up over the last few months, then P&G might narrow its full-year forecast closer to the 4% rate that would constitute its best showing in several years.

On the other hand, a tough competitive environment for branded consumer staples could spark a quick downgrade to the outlook, just as shareholders witnessed back in 2017. In either case, investors could see unusually high stock-price volatility from P&G as Wall Street adjusts its expectations on Tuesday.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool is short shares of Kimberly Clark and Procter & Gamble. The Motley Fool has a disclosure policy.