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What's Procter & Gamble Doing Right? Essentially, Everything.

Motley Fool Staff, The Motley Fool

Consumer products giant Procter & Gamble (NYSE: PG) closed the book on a fiscal year to be proud of Tuesday, delivering a fourth-quarter report that showed progress across the board. It beat on profits and revenue, raised guidance for fiscal 2020, and if you bought the stock this time last year, well, you have plenty to smile about.

In this segment from the MarketFoolery podcast, host Chris Hill and MFAM Funds CIO Bryan Hinmon discuss how P&G rebounded from a rough period a few years ago, reflecting on the transformation it undertook to focus on its strengths and fight back against young, disruptive competitors.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on July 30, 2019.

Chris Hill: Procter & Gamble is closing out its fiscal year in style. Fourth quarter profits and revenue came in higher than expected. P&G has also raised guidance for fiscal year 2020. The stock is up. The stock over the past year is up more than 40%.

Bryan Hinmon: En fuego!

Hill: [laughs] That is not what we typically expect from consumer products giants like P&G.

Hinmon: Yeah, this quarter and year was all about broad strength. All categories and all regions were up. The organic sales growth in Q4 of 7% was the best organic sales growth since 2007. Really strong, good all-around performance by Procter & Gamble. This is another company, we were joking about the three-year transformation at Under Armour, this company is going through a similar thing. In 2016, 2017 announced huge restructurings. They had started to get disrupted from all sides by start-up brands, and decided that they needed to focus their efforts on doing less. They were going to back their chosen strong brands and strong categories. You're really starting to see now the power of when a company focuses its resources on key areas. You can actually have a really strong impact. Procter & Gamble, really a great quarter. That 7% growth was split in a healthy way between volume, price, and mix. Really firing on all cylinders.

Hill: It's funny because I think back to when we started doing this podcast in January of 2011, Procter & Gamble was a consumer products giant then, it is now, and yet the business when we started back then was pretty different. I think about the changes that P&G has undergone. What you just talked about, for the last three years, it started in smaller ways a couple of years prior to that. For all of its success and all of its size, there used to be a lot more products. There was a whole food division that they had that they decided, "We have to get out of this business." And as you said, they've really focused on what they do best, which is stuff in the home. Home care, cleaning products, home care products.

I did want to ask you, though. You talk about how P&G is under siege from different upstarts. One part of their business that the upstarts appear to, maybe haven't won outright, but they appear to be winning in a pretty big way, is shaving. Did they write down all of Gillette to the tune of $8 billion? I thought I saw that this morning.

Hinmon: No, I don't think that's right. Grooming was actually up 4% for them. They have definitely been under fire from these start-ups like Harry's and Dollar Shave Club and that sort of thing. They have responded in kind. You can now sign up for a Gillette subscription service. They certainly got caught a little flat footed with a failure to innovate. But you can copy a business model. And they have done that. What Procter & Gamble is incredible at is product development and knowing their customers. That has not changed. They have stopped that bleeding. And as you see, there's growth now back in grooming that has not been there for a while. They had relied too long on simply raising prices and adding another blade. They're back to a steadier cadence of innovation with much more reasonable pricing. That hurt them for a while. But we're on the other side of that now. And they are competing more effectively. It's funny, you mentioned their business has changed a lot. They have 60% fewer brands. They really narrowed their focus to be able to back winners and market smartly. You own this company for very simple reasons. It should be pretty stable. It's a blue chip cash cow. We saw cash performance really strong -- this was their fourth quarter, so I'll say this year. And, they guided for really strong cash flow performance next year. They've resumed growing their dividend. In 2017, they only raised their dividend 1%. Fiscal 2018, 3%. Fiscal 2019 was 4%. Things seem to be back in order at P&G.

Hill: We've talked before about a company like Pepsi, when they are negotiating with grocery chains across the country, around the world, and they have not just all of these beverages, but they have all of the Frito-Lay products. They're operating from a position of strength in terms of where their placement is on the shelf. Think about Procter & Gamble. When they're going to negotiate with grocery stores, how much shelf space they are commanding, it's pretty incredible.

Bryan Hinmon, CFA has no position in any of the stocks mentioned. Chris Hill owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool is short shares of Procter & Gamble. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com