Market Overview

Follow Ackman Into P&G? Maybe, Maybe Not


On Thursday, shares of Procter & Gamble (NYSE: PG), the world's largest consumer products company, jumped almost four percent on volume that was nearly triple the daily average on news that Bill Ackman's Pershing Square Capital has built a position in the company.

Only time will tell what Ackman is angling to do with his investment in the maker of Gillette razors, Old Spice body wash and Tide detergent, among other ubiquitous brands. Given Ackman's reputation as an activist investor, chances are Pershing Square is not going to be treating Procter & Gamble as a long-term the investment the way so many investors have, including Warren Buffett's Berkshire Hathaway (NYSE: BRK-A, BRK-B).

Not surprisingly, speculation has already commenced as to what Pershing Square wants with P&G. Current P&G Chairman and CEO Bob McDonald is embattled to say the least, so Ackman could push for a management change. He did just that with J.C. Penney (NYSE: JCP), an investment that has not worked out as planned, to put things delicately.

Ackman could push for P&G to spin-off more brands, something the company has shown no qualms about doing. In the past several years, P&G has sold brands ranging from Folgers coffee, to Jif peanut butter to Pringles potato chips.

Ousting McDonald would likely be the more rewarding scenario for Ackman and anyone else that owns shares of P&G because the company has already engaged in multiple spin offs and still sees its shares lag some of its marquee rivals.

Assuming Pershing Square is not successful in either endeavor, Ackman could be left with two unattractive choices: Hold P&G in Buffett-esque fashion or sell the stake at what would likely be a loss. Those scenarios help answer the question about whether or not investors would be well-served following Ackman into P&G.

Part of the answer revolves around time frame, as in how long is one willing to hold P&G for? Buffett has said it is a long-term position for Berkshire, but in this instance several things are worth noting. First, Berkshire did not really build a position in P&G as much as it received P&G shares when the company bought Gillette, in which Berkshire was an equity investor.

In 2007, Berkshire own 101 million P&G shares. At the end of the first quarter, that number was 73.3 million shares.

P&G is typically viewed as the type of stock that conservative, long-term investors can buy without fear of losing sleep at night. It is a low-beta name that makes easy-to-comprehend products and has raised its dividend every year for more than five decades.

It is also an epic disappointment when compared to primary rival Colgate-Palmolive (NYSE: CL). In the past five years, P&G is up 3.6 percent while Colgate-Palmolive has surged nearly 60 percent. Since January 2007, the dividends of both stocks have nearly doubled, implying that investors did not give up anything in the way of dividend growth to get their hands on Colgate-Palmolive's superior alpha generation.

Of course, part of the argument in support of Ackman taking a stake in P&G is that he probably will not be sticking around for five years. Fair enough. In the past year, P&G is off 1.3 percent while Colgate-Palmolive has soared 21.2 percent. Church & Dwight (NYSE: CHD) is up nearly 43 percent while Clorox (NYSE: CLX) has jumped 9.2 percent. Kimberly Clark (NYSE: KMB) has climbed more than 26 percent.

In other words, those statistics beg the questions: How much alpha is Ackman really hoping for with P&G and why the heck does Berkshire still own this stock?

A similar situation is seen with Kraft (NYSE: KFT). Indeed, the largest U.S. food company has been a winning trade for Ackman and he is widely credited with forcing the company to spin-off its snacks business. It is a good thing he was successful in that endeavor because if Pershing Square were forced to hold Kraft in Berkshire-esque fashion, smart investors would wonder why General Mills (NYSE: GIS) was not chosen over Kraft.

In the past decade, General Mills has delivered more than nine times the returns of Kraft. In the past five years, Big G has offered better than double the returns of Kraft.

All of this is to say that even the pros make mistakes and Ackman probably should be careful not to become a passive, long-term holder of P&G shares. If that happens, he could end up wishing he had chosen Colgate-Palmolive to start.


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