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Solid PG Earnings to Further Boost Staples ETFs

Sanghamitra Saha

One of the most famous names in the consumer products world – Procter & Gamble PG – gave investors sweet surprises on October 22, 2019 by beating the Zacks Consensus Estimate for both earnings and sales in first-quarter fiscal 2020. In addition, the company’s raised guidance for fiscal 2020 also added to the upbeat tone. The stock gained 2.6% in the key trading session.

This positive news came at a time when half of the consumer staples ETFs returned more than the S&P 500 index in the one-year time frame (as of Oct 22, 2019) and three out of 14 staples ETFs carrying a Zacks Rank #1 (Strong Buy) and most having a Zacks Rank #3 (Hold).

Let’s delve a little deeper and see if PG’s strong numbers can do further good to the sector.

Procter & Gamble's 1Q20 Earnings in Focus

Procter & Gamble’s core earnings of $1.37 per share improved 22% year over year and outpaced the Zacks Consensus Estimate of $1.24. Meanwhile, currency-neutral core earnings per share (EPS) grew 24%. Procter & Gamble reported net sales of $17,798 million, beating the Zacks Consensus Estimate of $17,465 million and improving 6.6% year over year. However, the top line was hurt by currency fluctuations of about 2%.

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 7%, driven by 4% rise in organic shipment volume. Further, organic sales benefited 1% from increased pricing and 2% from favorable mix. Strong Personal Health Care, and Skin and Personal Care categories along with robust gains in Japan mainly aided the company’s mix. Notably, all of these have higher than average selling prices.

Driven by strong top-line growth, margin expansion and cash productivity witnessed in the fiscal first quarter, Procter & Gamble raised its view for fiscal 2020. The company now projects all-in and organic sales growth of 3-5% compared with 3-4% mentioned earlier. The guidance includes a modest impact of adverse foreign currency, which is likely to be mostly offset by slight gain from acquisitions and divestitures. Moreover, the company now projects core EPS growth of 5-10% for fiscal 2020 compared with 4-9% mentioned earlier. In fiscal 2019, it reported core earnings of $4.52 per share.

Consumer ETF Impact

Thanks to an upbeat earnings release, shares of PG notched up about 2.6% in the key trading session of Oct 22, 2019 on double the usual volumes. The gain also reflected in the ETF world, with consumer staples funds being benefited moderately. Many of the key funds in this segment have a double-digit allocation to the consumer product giant, suggesting that the performance of the fund is highly dependent on P&G’s performance.

Let’s take a look at the following three ETFs with a solid allocation to Procter & Gamble.

Consumer Staples Select Sector SPDR Fund XLP

The most popular consumer ETF on the market, XLP, follows the S&P Consumer Staples Select Sector Index. The fund invests about $13.91 billion of assets in 33 holdings. Of these firms, the in-focus P&G takes the first spot, making up roughly 16% of the assets. The fund has returned about 0.03% on Oct 22, 2019 (see all consumer staples ETFs here).

Vanguard Consumer Staples ETF VDC

This fund manages a $5.36 billion asset base and provides exposure to a basket of 89 consumer stocks. The product charges a low fee of 10 bps per year from investors. Here too, P&G is the top firm with 15% allocation. VDC advanced about 0.07% on Oct 22, 2019.

iShares U.S. Consumer Goods ETF IYK

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. The fund holds about 106 stocks in its basket with AUM of $481.1 million. Like the other two, the stock under consideration occupies the top position in the basket with 13.2% of assets. The fund gained 0.6% on Oct 22.

Bottom Line

Even though PG had a favorable day, its impact on the rest of the consumer staples market wasn’t as solid as some might expect. Yes, all of the major consumer staples ETFs were up, but their gains were not profuse.

Consumer staples had a good run in recent months as yields remained low on global growth concerns and this safe sector had a reason to outperform. However, such a rally added to the overvaluation concern.

But if PG’s outlook is any guide, the sector has still something to offer. However, to come to any conclusion, we need to keep a track on earnings of other staples giants (read: Tap Revenue Growth With These ETFs & Dump Earnings Recession).

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Consumer Staples Select Sector SPDR Fund (XLP): ETF Research Reports
 
iShares U.S. Consumer Goods ETF (IYK): ETF Research Reports
 
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
Procter & Gamble Company (The) (PG) : Free Stock Analysis Report
 
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