DBRS Confirms Procter & Gamble at A (high) & R-1 (low) with Stable Trends

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of The Procter & Gamble Company (P&G, or the Company) at R-1(low) and A (high) with Stable trends. The ratings are supported by the strong status of the Company’s global brands, which are all number one or number two in their respective categories. Strong volume growth in almost every operating division over recent periods has led to a strengthening of its leadership positions.

P&G’s rationale for its acquisition of Gillette in the fall of 2005 included a focus on faster-growing brands that deliver higher margins and are more asset efficient; enhanced brand and geographic diversification; and strengthening of retail relationships. In conjunction with the Gillette acquisition, P&G had established an annual sales growth target of 5% to 7%, cost synergies in excess of $1 billion, and an operating margin target of 24% by 2010.

Overall margins remain strong despite rising commodity costs as the increases were partially offset by the benefit of growth in scale and cost-savings programs. Marketing and overhead expenditure in base business increased behind initiative activity, but declined as a percentage of sales.

DBRS expects P&G to display decent earnings growth going forward on the back of solid organic performance and synergy benefits. The Company’s financial profile remains strong for the current rating because of its solid cash flow generating ability.

The rating also reflects the increased level of debt associated with the acquisition-related share repurchase. DBRS expects the absolute debt level to remain relatively steady and does not expect further large-scale acquisitions in the near to medium term. As such, P&G’s ability to generate substantial and growing cash flow should enable credit metrics to improve steadily. The Company’s ability to achieve earnings growth that leads cash flow to approach 35% to 40% of debt could result in positive ratings action.

In the meantime, the outlook remains stable as we continue to monitor P&G’s progress toward improving profitability, cash generating capacity, and debt profile targets over the near term.

Note:
All amounts are in U.S. dollars unless otherwise noted.