Procter & Gamble (PG 1.49%) is an ultra-reliable dividend-paying company. With a diverse and global portfolio spanning several daily use product categories and 68 years of consecutive dividend raises, P&G is a passive income powerhouse Dividend King that investors can rely on no matter what the company is doing. But that doesn't mean the Dow Jones Industrial Average (^DJI 0.48%) component is firing on all cylinders.
The company reported second-quarter fiscal 2025 results on Jan. 22. P&G returned to volume growth and reaffirmed its full-year fiscal guidance. What's more, P&G's results significantly improved in Greater China, with organic sales declining 3% compared to a 15% decline last quarter. P&G saw a pickup in consumption and travel retail out of China, with CFO Andre Scholten saying the company is "trending back toward growth in Greater China."
Management discussed China at length on this earnings call. Here's what is working and not working in China, buyer behavior trends, how P&G is developing new products to reflect changing consumer preferences. Scholten said, "I want to be clear, I don't think China is out of the woods."
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Navigating a challenging situation
In the first quarter of fiscal 2025, P&G saw flat overall volume, and negative volume growth in three of its five segments. While 85% of the business saw excellent 4.8% organic sales growth, Greater China, Asia, the Middle East, and Africa weighed heavily on the business, with a 7.5% decline in organic sales growth.
This quarter marked noticeable improvement in Greater China. But the region continues to be weak, especially because P&G's beauty business is big in China. P&G CEO Jon Moeller elaborated during the recent earnings call:
China beauty broadly has a higher presence in China than any of our other categories. And we're still not out of the woods, we'll use that expression again, on volume in China. So while sales were 3%, I believe volume was minus 6%. I feel comfortable that's going to continue to improve. But when you look at beauty volumes, you have to realize that China waiting, which in many periods has been a very positive thing, but now presents a challenge.
To spur growth, P&G is changing how it does business in China and implementing product innovations. For example, the Olay product line has historically focused on tone benefits in China, but P&G sees the market shifting toward anti-aging and multi-benefit products. So, P&G is adjusting its product pipeline to meet changing customer preferences.
In addition to Olay, P&G said it is innovating in core brands like Pantene and Head and Shoulders, and saw 5% growth in P&G-owned Japanese luxury skincare brand, SK II. P&G attributed the strong performance of SK II to brand building and improved sentiment in China toward Japanese brands.
P&G is applying strategies and processes that have worked in Europe and North America to China. For example, P&G's distributor channels that feed into wholesale markets and smaller grocery stores are now paid by category, not based on the total business. This means that distributors must deliver in each P&G category to be fully compensated. This gives the company better control from front-end innovation to customer discussions, which P&G said wasn't the case two years ago.
China is P&G's X factor
P&G can't control the market cycle in China, but it is taking steps to improve its product pipeline and how it distributes and positions its products in front of customers. Since China is underperforming by such a wide margin relative to strong geographies like North America and Europe, it will have a big impact on P&G's full-year fiscal 2025 guidance.
On the earnings call, P&G said it expects a recovery in the second half of its fiscal year (first half of calendar year 2025). However, China could single-handedly cause P&G to miss its organic sales growth forecast if P&G's progress in the region regresses. However, if China becomes even a neutral contributor to sales growth, P&G could hit the midpoint or slightly above its organic sales growth guidance.
P&G is forecasting 10% to 12% diluted earnings per share (EPS) growth in fiscal 2025 compared to 2024, core EPS growth of 5% to 7%, and all-in sales of 2% to 4%. Volumes, pricing, foreign exchange, and the product mix within a given category impact all-in sales growth. Despite a strong U.S. dollar, P&G didn't have nearly the foreign exchange headwind in the second quarter as seen in the prior quarter or in fiscal 2024. However, investors should remain aware of the risks a strong dollar and potential tariffs impose on the business.
P&G is still a top-tier dividend stock
P&G stock rose nearly 2% the day it reported earnings as investors cheered a return to volume growth and reaffirmed full fiscal year guidance. China also showed noticeable signs of improvement as P&G has done an impressive job changing its internal processes in the region to help offset slowing consumer spending.
All told, China is still dragging down the stock, but not to the extent of prior quarters. P&G's recovery in the region is a testament to the strength of its brand portfolio, new product development, highly efficient supply chain, and marketing.
The stock remains a solid buy for risk-averse investors looking to boost passive income generation for years to come. Investors can likely count on P&G to raise its dividend in April as it has done for decades.
P&G has a yield of 2.4% compared to 1.2% for the S&P 500. And while you can find much higher-yielding stocks than P&G, there are only a handful of companies with a combination of industry leadership, recession resistance, and dividend reliability on par with P&G.
Add it all up, and P&G is a stock to consider buying now.
