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P&G Hygiene and Gillette return excess cash, boost return ratios

LiveMint logoLiveMint 08-05-2017 Ravi Ananthanarayanan

Procter & Gamble Co.’s listed subsidiaries in India are paying a huge dividend to shareholders, a major share of which will go to the parent company. The Indian subsidiaries’ cash holdings will get depleted but their return ratios will improve, apart from improving the dividend yield in the current fiscal.

P&G Hygiene and Health Care Ltd plans to pay an interim dividend of Rs362/share or 5% of its current market price. Its previous dividend was Rs36/share in November 2016 and before that, Rs30.25/share in October 2015, as per BSE data. Gillette India Ltd will pay Rs154/share or 3.5% of its current share, much higher than its earlier dividends.

P&G Hygiene will pay out Rs1,175 crore as dividend and Rs240 crore as dividend distribution tax. As of 31 December, its cash and bank balance was Rs1,217 crore. Gillette’s dividend payout will be Rs502 crore and tax on it will be Rs102 crore. Its cash and bank balance was Rs511 crore. The March quarter would have added some more to their existing cash balances, and by the time the dividend is paid out (by end-May), it would have increased more. Safe to say that they will have very little cash left.

Will that hinder their business? Since neither company has shown interest in acquisitions, that is not a requirement that will suffer. As most good consumer companies, their businesses are not working capital intensive; in the year ended June 2016, P&G Hygiene generated net cash from operations of Rs353 crore while Gillette churned out Rs279 crore of cash. Even if circumstances demand liquidity, they can borrow with little difficulty.

On the positive side, their return ratios will improve significantly. So, dividends and improved return ratios should be positive for valuations, but note that these P&G stocks already trade at premium valuations.

Their March quarter results, along with which the dividend announcement was made, show them emerge from the shadows of demonetization. Gillette has done much better, with its sales increasing by 16% from a year ago, operating profit by 51% and net profit by 54%. P&G Hygiene has seen a relatively slower comeback, with sales rising by 5.5%, operating profit by 15% and net profit by 2.6% (lower chiefly due to a higher tax incidence).

P&G will get a sizeable share of the payout, as it owns a 70.5% share in P&G Hygiene and 75% in Gillette. P&G intends to return a significant amount of cash to its shareholders and this payout will contribute a bit to that kitty. While this payout may cause some excitement, attention will go back to the business.

Gillette is doing well to grow both sales and profits, but P&G Hygiene is finding the going tougher. The FMCG sector itself is still not out of the woods on the demonetization front, especially as the wholesale channel continues to be affected, which has affected sales to smaller outlets and in rural areas. After a quarter or more, a clearer picture should emerge. Another aspect to watch out for is if the companies’ dividend payouts step up compared to earlier years, although it can’t match this fiscal’s one-time payout. That can contribute to sustaining the return ratios, which will otherwise begin to slide.

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