Procter & Gamble (PG)

Total return at 5 years: 5.5%/year = 2.5% appreciation + 3.0% dividend. The target price ($173) is ex-dividend; the $25 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $182 · Multiples $160) exceeds the market price ($153).

Today — fairly valued: at $153 trades ~4.4% below its value discounted to today (~$160); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($173) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$102.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($153) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (1.3%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$17.8 bn of owner earnings in year 5 (vs ~$21.3 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Utilidad core (P/E). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: year 0 is the closed 2026 fiscal year (sales $87.0bn at 30-Jun-2026, 10-K of 4-Aug-2026; fiscal year ending in June). PG is the global consumer staples leader: 5 segments and dominant brands (Tide, Pampers, Gillette). It is valued on P/E over core earnings ($16.7bn, core EPS $6.89), ex-restructuring and one-offs — GAAP is lower (EPS $6.62). Year 1 is not extrapolated: it is set by the company's own FY2027 guidance, and both of its anchors are read, sales of +1 to 3% and core EPS of $6.89 to $7.11 (midpoint $7.00). The bear and bull cases take the extremes of that same range, so none of the three is a number set by eye. That flips the shape of the path —a trough in FY2027 and recovery afterward, the rebound exception— because the company quantifies ~$0.56 per share of headwinds from commodities, energy, freight, interest and FX: eight points of drag on core EPS. From there the path returns to ~3% sales growth and the core margin recovers toward 19.6%, still below FY25's 19.9%. Exit multiple 20× (base; bear 17× / bull 22×): the upper part of the consumer staples band, a premium for quality (ROIC ~21%, ROE ~30%, a Dividend King of 70 years). P/E delivers equity directly; net debt of $24.2bn lives in the DCF. A full returner: it returns nearly all of the flow (dividends ~$10bn plus buybacks ~$5bn against FCF of $15.1bn), so it does not accumulate cash and the share path models buybacks at ~1.3%/year, the net reduction the fiscal year itself revealed.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $173 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $153, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $173 in 5 years plus $25 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $160. Against the current market price ($153), the margin of safety is 4.4% (trades below the maximum → there is margin) and the total return at that price would be 5.5% annually.

• P/E on core earnings. Valued on P/E over core earnings (ex-restructuring/one-offs). It's a consumer staples business → equity-level P/E; the ~$25bn net debt sits in the DCF.
• The 2026 de-rating. At ~$153 PG trades at ~22×, punished by near-term headwinds.
• The multiple holds, it doesn't compress. At ~22×, the terminal is set at ~20x (stable, ~19×) — the return comes from ~5% core growth plus the dividend, not a punitive compression.
• The DCF at the risk-free rate. The DCF (second lens, on core earnings) yields a value above the price: the stable generation supports more than the currently depressed quote.
• Margin of safety at the end. At ~$153 the base return (~+6%) comes from the dividend (2.8%) plus ~5% core growth; the margin is moderate — a quality dividend king at a sensible price, not an extreme bargain.
• Dividend king. 70 years of increases ($4.35, yield 2.8%) — a strong return anchor and a signal of exceptional stability.

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (99%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong and predictable cash. FCF ~$15bn/year, ~90% conversion, extremely stable through the cycle — the cash generation of a top-quality consumer staples business. Covers the dividend (~$10bn) comfortably.
• Return on capital. ROIC ~18%, ROE ~30%, well above the 10% bar — a business with high, durable returns, though ROIC is diluted by Gillette's goodwill.
• Creates economic value. Yes — the brands and scale generate returns well above the cost of capital consistently; retained capital is returned (dividend + buyback) rather than squandered.
• Gillette goodwill. Gillette's goodwill ($12.8bn) is "at risk" of impairment (the annual test passed by a >10% margin); it already took a $1.0bn impairment in FY2024. A reminder that Gillette was bought expensive (2005).
• Immaterial SBC. Stock-based compensation (~$506M, ~0.6% of revenue) is immaterial → there's no SBC trap; P/E and owner-FCF converge.
• Core earnings vs GAAP. Core excludes restructuring ($1.5-2bn) and one-offs (Argentina FX $801M, Glad gain $261M). The adjustments are legitimate (genuine one-offs), but restructuring is recurring at PG — watch that it doesn't become permanent.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

PG earns via volume × price on brands with pricing power: it raises prices modestly (+1-2%/year) and gains volume through innovation. Organic growth (ex-FX, ex-acquisitions) is the key metric for a consumer staples business — it separates the real figure from currency noise. Core earnings exclude restructuring and one-offs (the Argentina FX charge, the gain from the Glad partnership dissolution); it's the valuation base. Operating cash flow is clean (immaterial SBC ~0.6%, FCF conversion ~90%).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal, growth. Organic +2% (volume +1, price +1) is real; the reported figure (+0% FY25) is depressed by weak-currency FX. A consumer staples business grows little but does so in a real and predictable way.
• Where the engine comes from. The 5 segments grow at a low-to-mid-single-digit organic rate; the engine is Fabric and Home Care (the largest) plus Health Care (the fastest-growing). Price (+1-2%) plus volume plus the buyback deliver ~5% core EPS growth.
• Near-term headwinds. Greater China (contracting market, SK-II/oral care declining), tariffs and inputs (margin −80 basis points), and soft volumes from private label are slowing near-term growth — the current rough patch.
• Realistic growth. The base case projects core EPS growing ~5%/year (organic ~3% plus margin plus the buyback), decelerated near-term by the headwinds and reaccelerating toward the mid-to-high-single-digit algorithm.
• Reinvestment runway. Limited (mature business): capex is 4-5% of sales, innovation is incremental. The runway is more about margin and the buyback than about high-return reinvestment — returning the surplus is correct.
• Private label / trade-down. The secular risk: private label and hard-discount channels gain share; the "K-shaped" consumer squeezes the middle tier. Pricing power is the ongoing test.

• Relevant in 10 years / recurrence. Yes — everyday consumer products (detergent, diapers, grooming, oral care) with structural, recurring demand; purchased in any economic cycle. Maximum predictability.
• Differentiated product. Yes, through brand and product superiority, but of the "consumer" type — the consumer can switch to private label if the price gap widens. The differentiation is real but not absolute.
• Share / position. Global leader: >45% in grooming (>60% in blades), >35% in fabric, >30% in diapers and oral care. Dominant shares across nearly all categories.
• Pricing power. Yes, modest and steady (+1-2%/year), demonstrated through recent inflation. The test is not straying too far from the private-label price — so far volume has held up.
• Operating leverage. Core operating margin ~24%, stable, with ongoing productivity savings (330 basis points gross in the latest quarter). Pressured near-term by tariffs and inputs (−80 basis points net).
• Recession behavior. Defensive by nature: consumer staples demand is not discretionary; PG is a classic recession refuge. The risk is trade-down to private label, not the disappearance of demand.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 1.0x
• ✓Interest coverage (EBIT / interest)23.4x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 99% of ROIC
• ✓Value creation (ROIC − 10% bar)+11pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.4x
• ✓Float / working capitalFrees up cash $0.4 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.6% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Investment-grade balance sheet. Net debt ~$25bn (~7% of market value, ~1.3x EBITDA); very ample interest coverage. One of the strongest balance sheets in consumer staples. Zero solvency risk.
• Cash generation. OCF ~$19bn, capex ~$4.4bn → FCF ~$15bn; ~90% conversion. Covers the dividend (~$10bn) and the buyback (~$5bn) out of cash flow, without leveraging up. A stable cash machine.
• Sustainable full-returner. Returns ~$15bn (dividend + buyback) ≈ FCF; doesn't accumulate cash (returns it). Sustainable as long as FCF holds — 70 years of history back it up.
• Goodwill / intangibles. Goodwill $41.7bn + intangibles $21.9bn (Gillette, acquired brands); Gillette's ($12.8bn) is "at risk" of impairment. Not a cash risk, but it is a book-value risk.
• FX in inflationary markets. Exposure to weak currencies (Argentina wound down, $1.2bn FX charge) subtracts from the reported figures; it's a recurring drag but not a solvency one — a cost of the global business.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Disciplined full-returner: dividend prioritized (70 years) + buyback ~$5bn ≈ FCF. Almost no large M&A (avoids diworsification). Correct for a mature, high-return business.
• Alignment / skin in the game. Professional management (insiders <0.2%); ownership requirement of 8x salary for the CEO (exceeds it). Alignment through compensation structure, not founder ownership.
• Promotion from within. Moeller is a 15+ year veteran (former CFO); a culture of internal development — continuity and deep knowledge of the business, though less outside disruption.
• Restructuring / refocus. The Jun-2025 plan (7,000 roles, brand exits) refocuses the portfolio; the test is whether it improves margin and growth or just cuts costs — execution will show in 2026-27.

• The 2026 punishment: at ~$153 PG trades at ~22× core earnings — the market punished near-term headwinds (tariffs ~$0.25/share, Greater China, core EPS guidance "toward the low end" of the range) on an otherwise intact franchise.
• This is a motivated sale driven by the rough patch, not by the business: organic growth remains positive (+3% in the latest quarter), pricing power intact (+1% price), and share positions dominant — but the market is extrapolating the compressed margin (−80 basis points from tariffs) and China's weakness.
• It trades at ~22× core earnings, a multiple that does not fully reflect the quality of a dividend king.

The perception-reality gap is moderate: the market sees the near-term rough patch (tariffs, China, margins) and discounts a quality dividend king below its normal multiple. It's not an extreme bargain — PG still trades at ~22× core earnings — but it is a reasonable entry into an intact franchise at an elevated yield (2.8%) while the sector trades expensive.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at ~0%/year (+2% total): the margin of safety protects the downside. The bull (+9%/year, +53% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Private label / trade-down. Private label and hard-discount channels gain share; the "K-shaped" consumer squeezes PG's middle tier. If pricing power runs out, volume and margin give way — the central disconfirmer.
• Greater China. Contracting market plus local competition: hair care, skin care (SK-II) and oral care are declining at high/mid-single digits. A structural drag for now on a market that used to be an engine.
• Tariffs and input inflation. Tariffs (~$0.25/share of headwind) and inputs (resins, pulp) compress core margin (−80 basis points despite productivity); a persistent margin risk.
• Customer concentration. The 10 largest customers are 43% of sales (Walmart ~16%): retail negotiating power over prices and shelf space.
• Gillette impairment. Gillette's goodwill ($12.8bn) passed the annual test by a >10% margin but is "at risk"; an impairment would hit GAAP (not cash or core).

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 21% above the 10% bar, but the margin is limited (+4%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a PEG of 4.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 21% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 1% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -3%/yr, bull-scenario ceiling +6%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, cost advantage, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 1%, within what we project (5%) — the story squares with the numbers.