Any time a major company completes a management change, a new business strategy or changes in operations tend to follow. After undergoing an aggressive cost-cutting campaign during the past year, Procter & Gamble (click ticker for report: ) CEO and Chairman Bob McDonald seemed secure in his job. Thus, we were shocked to see McDonald announce his retirement, and even more surprised to see that his replacement would be the man he replaced, A.G. Lafley.
Other than JC Penney rehiring Mike Ullman, we haven’t seen many companies bring back the old CEO, unless he or she was the founder. Recent examples like Phil Knight, Howard Schulze, Michael Dell, and Steve Jobs were all founders that were passionate about returning their companies to glory. This doesn’t alter our view on Lafley, especially considering he spent his entire career with P&G.
During his first rein atop the leading consumer products giant, Lafley oversaw some large acquisitions, including beauty companies Wella and Clairol, but he is most famous for merging the company with Gillette. Concurrently, Lafley sold some of what he deemed non-growth assets, including Folgers, Sunny Delight, and the company’s pharmaceuticals business. Lafley is best known for his strategy of leading a customer-centric experience and letting the market dictate what products it wants–not the other way around. This strategy resulted in more productive R&D spending, and even better bottom-line results. Lafley also advocated productive advertising, so we’re interested to see if he continues McDonald’s focus on cutting costs, or if he returns to attempting to drive growth.
While he received a large amount of criticism during his tenure, particularly from hedge fund manager and P&G shareholder Bill Ackman, McDonald was essentially groomed and handpicked by Lafley to be his successor. Although McDonald’s share returns may not have compared to those achieved under Lafley (returning 54% compared to an 80% return for the S&P 500), we actually thought the core business was improving. Still, McDonald apparently thought his presence was distracting attention away from the company, and he claims the decision to leave was his own.
Overall, we’re excited about Lafley’s return—he’s a well-respected leader, and we think his focus on driving top-line growth coupled with the previous plan to reduce costs could help propel solid earnings and free cash flow growth. We also think the change in leadership could make the company more active in selling and purchasing brands. Even though he was retired, Lafley isn’t that old (almost 66), so we think he could be around for a while in order to enact these changes. After this change in leadership, we plan to re-evaluate our fair value estimate, but we do not anticipate closing out our position in the portfolio of our Dividend Growth Newsletter.