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The ‘bear market’ is great – now we’re buying quality American stocks at a discount

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 Procter & Gamble sign - Procter & Gamble
Procter & Gamble sign - Procter & Gamble

The start of a bear market in America has neatly coincided with Questor’s new column on American stocks, which this week appears today rather than the usual Wednesday, and the S&P 500’s 19pc fall since early January means it is now possible to invest in high-quality companies at far lower prices.

The advent of a bear market is good news for net buyers of stocks who have a long time horizon. Certainly, it hurts the value of their existing holdings in the short run. But it enables them to access more enticing prices that offer greater scope for capital growth over the coming years. Moreover, every previous S&P 500 bear market has been followed by a new record high during a subsequent bull market.

Since the US economic outlook remains uncertain thanks to high inflation and rapidly rising interest rates, this column intends to focus only on financially sound businesses. With net gearing (net debt to net assets) of just 55pc, consumer goods company Procter & Gamble is in a relatively commanding financial position to navigate short-term economic challenges.

Its modest debts meant that net interest payments were covered nearly 40 times by operating profits last year. This shows that it is well placed to ride out an environment of higher interest rates.

The company is also successfully mitigating the effects of rapidly rising input costs via price rises. Its wide variety of well-known consumer brands, which range from beauty products such as Head & Shoulders shampoo to home care products including Fairy washing-up liquid, command significant customer loyalty.

This allowed P&G to increase its prices during the most recent quarter without experiencing a decline in volumes sold. In fact, higher prices accounted for the majority of its 7pc quarterly rise in net sales. And with productivity savings contributing to a modest rise in operating margins (at constant exchange rates) in the most recent quarter, P&G appears to be surmounting the highest US inflation rate since 1981 with relative ease.

The company has a long record of delivering stable, growing returns. For example, its beauty segment, which accounts for around a fifth of sales, has produced 26 consecutive quarters of organic sales growth. A high level of consistency has also enabled the company to raise its dividend for 65 consecutive years.

Last year’s 10pc rise in shareholder payouts, coupled with a 12pc fall in its share price so far this year, take the current yield to 2.3pc. While this is less than the yields on offer elsewhere, the prospect of rapid dividend growth and the company’s consistent performance combine to offer significant long-term income appeal.

P&G also has encouraging growth potential. It is benefiting from “premiumisation” trends across its key markets as consumers trade up to more expensive variants of its products. This helped the company to raise its sales guidance for the full year when it released its third-quarter results.

It is also improving its competitive position: more than three quarters of the company’s key brands either maintained or grew their market share in the most recent quarter. And with e-commerce sales increasing by 35pc in its latest financial year – they now account for 14pc of total revenue – it is well positioned to adapt to evolving consumer spending habits.

Despite the recent fall in the share price, which has taken it to a level only modestly higher than before the pandemic, P&G retains a premium valuation. It trades at around 24 times forecast earnings, which could discourage some from buying it.

However, in Questor’s view the company is well worth its current market valuation. It has an enviable product portfolio with a solid record of delivering growth and raising dividends in a range of market conditions. It is also extremely well placed to overcome a period of high inflation and rising interest rates, an environment that seems destined to persist over the coming months.

With attractive long-term growth potential as an improving economic outlook gradually emerges, it is a very high-quality company that merits purchase.

Questor says: buy

Ticker: NYSE:PG

Share price at 5:45pm: $143.73

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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