Morningstar Ratings | Company Name: Procter & Gamble Co

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07/22/2019 Withdrawn Procter & Gamble Co WO

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07/22/2019 Procter & Gamble Co Withdrawn Rating Corporate

Credit Ratings Analysis

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Credit Perspective
Published On : 12/18/2018

P&G’s credit rating is derived from the cash flow generated by the company’s global leadership in the household and personal-care products sector and a moderate use of financial leverage. P&G’s portfolio consists of 21 brands that each generate over $1 billion of revenue per year and another 11 brands that generate over $500 million in annual sales. P&G’s vast economies of scale and dominant market positions produced by the intangible assets of its branded portfolio have resulted in the assignment of a wide economic moat by Morningstar’s Equity Research Group. Although P&G operates as the leading player in the worldwide household and personal-care category, it is not immune to aggressive competition, private-label incursions, and at times changing and lackluster consumer spending.

P&G continues to report financial and operational improvement indicative of the success of its restructuring program. The company has 65 brands that accounted for more than 85% of its top line and 95% of its profit. The company is in the midst of a five-year (FY 2017-22) $10 billion multi-year productivity and cost saving plan that is expected to lead to the optimization of its supply chain and manufacturing process and improve its margins and cash flow. P&G has a long track record of operating with high interest coverage and moderate leverage. We project leverage will average 2.0 times over our five-year forecast period and interest coverage will exceed 20 times. Although leverage is high for the rating category, P&G’s benefits from minimal Business Risk and a strong Solvency Score and a very strong Distance to Default score, which supports our credit rating. P&G’s Cash Flow Cushion ratio is moderate for its credit rating due to substantial CP and debt maturities within the forecast period, which represent 65% of the firm’s debt; however, based on P&G's substantial liquidity and robust free cash flow generation, we believe it will have no difficulty managing its debt portfolio.

Capital Structure
Published On : 12/18/2018

At Sept. 30, 2018, P&G total debt was $31.3 billion including $10.5 billion of short-term debt, which we estimate that a significant portion was commercial paper. P&G’s maturities are estimated as follows: $2.6 billion in 2020, $2.0 billion in 2021, and $16.2 billion thereafter. These maturities are manageable considering the company’s liquidity, which totals $11.2 billion, composed of $2.5 billion of cash and cash equivalents and $8.7 billion of investments available for sale, at period-end. Financial flexibility is provided by the company’s $8.0 billion of credit facilities, which is split between a $3.2 billion five-year facility that expires in November 2022 and a $4.8 billion 364-day facility that expired in November 2018 that we believe was renewed. The credit facilities also support P&G’s commercial paper program. P&G issued euro 2.1 billion of senior notes in multiple tranches in October, which we believe the proceeds was used in part to finance the company’s $3.9 billion acquisition of Merck KGaA over-the-counter healthcare business in November. The acquired business had approximately $1.0 billion of revenue that was generated in Europe, Latin America, and Asia.

P&G’s other material obligation include its defined pension benefit plan, which was underfunded by approximately 28% or $4.4 billion at fiscal year-end. Trailing 12 months total debt/adjusted EBITDA was 1.8 times, EBITDA/interest was 33 times and free cash flow (cash flow from operations less capital expenditures and dividends) was $3.8 billion. P&G’s management has articulated that it intends to deliver another year of 90% or better cash flow productivity and accordingly expects to pay nearly $7 billion in dividends and to spend $5 billion on share repurchase in fiscal year 2019. Beyond reinvesting in the business, we expect that dividend payments will remain a top priority of cash, and we forecast mid- to high-single-digit dividend increases during the near to intermediate term.

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Regulatory Disclosures

Rule 17g-7(a) of the Securities Exchange Act of 1934 requires that certain disclosures be made when a credit rating action is taken. In this context a credit rating action is considered (1) a publication of an expected or preliminary credit rating assigned to an obligor or security before the publication of an initial credit rating; (2) an initial credit rating; (3) an upgrade or downgrade of an existing credit rating; and (4) an affirmation or withdrawal of an existing credit rating if the affirmation or withdrawal is the result of a review of the credit rating assigned to the obligor or security using the firm’s applicable procedures and methodologies for determining credit ratings.

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