Important disclosures appear on the last page of this report.

September 19, 2011 Consumer Goods (Personal Products)

Henry Fund Research

Procter & Gamble (P&G) Investment Recommendation HOLD

Spencer Anderson spencer-anderson @uiowa.edu

Current Price $64.33

Target Price Range $76-79

Source

1: http://finance.yahoo.com

Key Stock Statistics1

52-Week Price Range $57.56-67.72

Market Capitalization (B) $176.76

Shares Outstanding (M) 2,750

Institutional Ownership 58.1%

60-Month Beta 0.48

Dividend Yield 3.30%

Price/Earnings (ttm) 16.37

Price/Book 2.61

Price/Sales 2.09

ROA (ttm) 7.42%

ROE(ttm) 18.23%

Projected 5-Year Growth 9.40%

EPS ($)

Year 2009 2010 2011 2012E 2013E 2014E

EPS 4.49 4.32 4.17 4.30 4.45 4.67

All earnings represent earnings from operations and have been filtered from net nonrecurring gains.

Valuation Models

Discounted Cash Flow $90.15

Economic Profit $90.15

Relative P/E $56-61

Dividend Discount Model $62.67

INVESTMENT THESIS

(+) Procter & Gamble (P&G) is one of the most stable companies in the consumer staple sector with 50 individual brands that generate $1B in revenue/year. P&G uses the cash flows from these established brands to reinvest in a strong R&D department which continues to innovate and create new products and market segments.

(+) Returned capital to shareholders continues to be strong with P&G a 3.3% dividend, which has increased every year for the past 55 years, and a strong $7.0B stock repurchase program with $6.0B expected to be repurchased in 2012.

(-) P&G attempted to maintain prices during the recession which led to many consumers trading down to off-brands or private label staple products. The strong US middle class, which P&G targets, has seemed to disappear with much uncertainty as to when or if the middle class will return in the next 3-5 years.

(-) P&G’s new pricing strategy does not fit with their business model. Moving down to assist the low-end consumer will deteriorate margins and likely does not allow P&G to increase prices once the US middle class recovers. We see relatively constant margins as higher margin levels in developing economies offset lower US margins.

(-) P&G is highly levered to the success of Walmart. Walmart represents 16% of all revenues which allows disproportionate bargaining power against P&G during a time when Walmart is investing in private label branding.

(+) International growth remains a catalyst for P&G. By establishing strong relationships with BRIC consumers, P&G will be in a strong position as the middle class grows. P&G intends to increase its average product offering/country from 19 to 24 by 2014 which will lead to higher revenues per consumer.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

2

EXECUTIVE SUMMARY

Procter & Gamble's (P&G) business is focused on providing branded products of superior quality and value. P&G's products are sold in more than 180 countries. In the FY11, ended June 30th, North America accounted for 42% of total sales, Western Europe 21%, Asia 15%, Latin America 9%, and other geographic areas 13%.

Source

3: P&G 10k

P&G's customers include mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores. Sales to Wal-Mart Stores, Inc. and its affiliates represented about 16% of total FY10 revenue

2. P&G's top 10 customers accounted for about

32% of total unit volume.

We recommend a HOLD on Procter & Gamble because of its market position in a slowly recovering economic climate, uncertain pricing strategy in the US, strong ties to Walmart, strong strategic growth initiatives internationally, and its reputation in successfully launching new products. P&G’s strong relationships with its consumers result in a market position of 50+ number one brands worldwide. The 50 most successful brands accounted for 90% of its earnings in 2011. In the past 16 years P&G has had 132 products on SymphonyIRI Group’s list of each year’s 25 most successful new products, more than their six largest competitors combined

3.

COMPANY DESCRIPTION

P&G operates manufacturing facilities around the world in order to distribute and sell its wide variety of products to every consumer on earth. “Touching Lives, Improving Life,” is the company motto as P&G tries to touch all lives in the world and improve each life through P&G products

4. By operating manufacturing

around the world P&G reduces the foreign exchange risk involved with selling products worldwide. P&G

served 4.2 billion customers in 2011 and is on track to serve 5 billion by 2015

3.

P&G had revenues of $83.81B in 2011 through its six reportable business segments: Beauty ($20.16B), Grooming ($8.03B), Health Care ($12.03B), Snacks and Pet Care ($3.16B), Fabric Care and Home Care ($24.84B), and Baby Care and Family Care ($15.61B).

Source

3: P&G 10k

P&G has seen strong growth in the Fabric Care and Home Care segment as well as Baby Care and Family Care segments since 2009. We see this continuing and expect Baby Care and Family Care growing between 3-6% and Fabric Care and Home Care growing between 3-5% through 2015. Other segments are expected to grow between 1-3% through 2015.

Source

3: P&G 10k

P&G uses the strong recurring revenues and cash flows from its six businesses and reinvests into R&D product development. This allows P&G to provide consumers with the most cutting edge products or concepts and establishes brand loyalty. According to CEO, Robert McDonald, “Price promotion may win a quarter here and there, but innovation wins decades.” P&G has executed on this strategy by continuing to innovate with new products and market segments like Crest Whitestrips, Liquitabs, and Febreze. P&G invests

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

3

$2B/year (2.4% of sales or 12.6% of operating income) in R&D which is about 60% more than the closest competitor and more than most of its competitors combined. Beauty P&G is the global market leader in the Beauty category. P&G competes in many different product categories which are generally very fragmented including: cosmetics, female blades/razors, skin care, hair care, and prestige fragrances.

Beauty Brands:

Pantene

Head & Shoulders

Rejoice

Venus

Olay

Covergirl

Secret The Beauty segment distributes its products through the distribution channel located below. P&G mainly relies on mass merchandisers and supermarkets to sell its products and prefers not to sell its products through wholesalers or direct sellers. Beauty is expected to grow at a modest 1% in 2012 as the world economy continues to struggle and pick up to 3% in 2013-14.

Source5: Ibisworld.com

Grooming The majority of Grooming revenues come from male blades and razors. P&G leads in market share for this category in nearly all of the geographies it competes in. The global market share is north of 70%. The dominance in this area is a direct result of the $57B acquisition of Gillette in 2005. This deal included not only Gillette’s signature razor line (Mach III, Fusion, Venus, Sensor), but also Duracell batteries, Braun and Oral-B brands in dental care. The grooming segment is expected to grow at 2% in 2012 before picking up to 4% growth in 2015.

Grooming Brands:

Gillette Fusion

Mach3

Proglide

Braun

Old Spice Fabric Care and Home Care This segment is comprised of laundry detergents, additives and fabric enhancers, dish washing liquids and detergents, surface cleaners, air fresheners, and batteries. P&G holds a #1 or #2 market share in fabric care markets it competes in with 30% of the global market. Home Care owns 15% of the market in the categories P&G competes in. Finally, Duracell batteries hold a 25% share of the global batteries market. Fabric Care and Home Care continue to be fast growing units with P&G continuing to monetize new markets like Febreze and Swiffer. We expect this unit to grow between 3-5% through 2015.

Fabric Care and Home Care Brands:

Febreze

Dawn

Tide

Dash

Ace

Duracell

Bounce

Downy

Cascade

Baby Care and Family Care P&G mainly competes in diapers and baby wipes in this segment with approximately 35% of the global market share. Pampers is the company’s largest brand with $9B in annual net sales. The paper products in this segment are mainly confined to North America and include Charmin bath tissue and Bounty paper towels. Baby Care and Family Care are expected to grow at 3-6% through 2015 as emerging economies are introduced into affordable paper products as substitutes to cloth options.

Baby Care and Family Care Brands:

Bounty

Charmin

Pampers

Luvs Healthcare P&G competes in oral care, feminine care, and personal health. Through its brands, P&G holds a #2 market share in oral care with 20% of the global market. Feminine care products have a 30% share of the global market. In personal health P&G dominates the OTC heartburn market behind Prilosec OTC. Healthcare is expected to have modest growth of 1-4% through 2015.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

4

Healthcare Brands:

Crest

Oral-B

Prilosec OTC

Vicks

Always Snacks and Pet Care The snacks segment of this business is a declining business due to the divestment of the Pringles brand to Diamond Foods in April 2011

6. This marked the final

food brand divestment for P&G after selling Jif peanut butter, Folger’s coffee, and Crisco shortening. P&G is focused on higher margin products with less competition. These divestments make sense within the P&G business model which revolves around products with long shelf lives and similar distribution channels. We believe this business unit will be renamed to Pet Care for 2012. We do not expect P&G to eliminate this segment because the margins on Pet Care are high and have less competition than the snack industry. This segment is expected to decrease by 15% in 2012 as the revenues from Pringles are removed before increasing by 5% in 2013.

Pet Care Brands:

Iams

Eukanuba The Pet Care segment includes the premium Iams and Eukanuba brands. This business is primarily located in North America where P&G has 10% market share.

RECENT DEVELOPMENTS

Fourth Quarter Earnings P&G reported Q4 2011 earnings on August 5, 2011 of $0.84/share compared to $0.71/share in Q4 2010. This exceeded consensus of $0.82/share due to sales growth in Health Care, Home Care and Family Care, and other net income. Input costs were higher than expected as inflation continues to be a risk to P&G’s margins

7. P&G guided $1.00-$1.04 Q1 EPS 2012 on 6-

9% sales growth and $4.17-$4.33 for FY2012 on 5-9% sales growth. We expect P&G will come in on the lower side of this expectation ($4.17) as margins are squeezed due to the weak US consumer and P&G’s new pricing strategy for some of its products. Dividend Increase P&G increased its dividend by 9% to $0.525/qtr. or $2.10/share for the 2012 fiscal year. This marked the 55

th straight year P&G has increased its dividend and

has paid dividends to investors for 121 straight years8.

For fiscal year 2011 P&G returned $12.8B to

shareholders through dividends ($5.8B) and share repurchases ($7.0B). Divestment of Pringles As previously mentioned, the last remaining snack/food brand with P&G was divested in April 2011 to Diamond Foods for $2.35B. The transaction included $1.5B of Diamond Foods stock distributed to P&G shareholders. P&G will no longer compete in the snack segment and instead focus on higher margin businesses with better synergies. The distribution channels for snacks did not make sense for P&G with many smaller purchasers making it hard for P&G to maintain profitability while continuing to have strong market share

4.

Simplifying Businesses Along with the divestment of the last of the remaining snack businesses, P&G is working on an initiative to simplify its businesses through the use of common packaging, formulas, equipment, and operational systems during manufacturing. P&G aims to move from more than 500 manufacturing platforms in 2009 to 150 by 2014. This will allow product to get to market sooner and around $500M in savings. P&G is simplifying these processes by limiting the amount of choices the consumer has through its product offerings. By using customer research and deep shopper insights P&G plans on making the productivity of its more than 50,000 different product offerings by 30% in the next 3 years

3. Simplifying the

product offerings on the shelf will reduce confusion and increase cost savings. This coincides with the two-tiered pricing/branding strategy. Two-Tiered Pricing/Branding Strategy The economic downturn has disrupted P&G’s strategy of dominating the upper tier of branded products in each segment. P&G’s strategy is typically to have the #1 or #2 market share in each product category it competes in. P&G has typically focused on serving the wealthy and strong US middle class with strongly branded household staple products. As shown by the charts below, the middle class has struggled during this downturn with a rising disparity in income inequality, declining middle-class income, and a very negative consumer confidence level for households earning $35,000-$49,999

9.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

5

Source

9: Wall St Journal

This has resulted in P&G needing to lower prices for the middle class or risk losing sales through lower prices and coupons. The middle class has essentially evaporated and traded down to off-brand or no-brand staple products which has hurt P&G. To combat this, P&G has recently announced launching products aimed at the lower-income households. The consumers on the high end are still purchasing their trusted P&G products which enables P&G to execute an “hour-glass” branding strategy to keep margins on the high end, while keeping volumes and market share on the bottom end.

INDUSTRY TRENDS

We have a neutral fundamental outlook for the household products sub-industry for the next 12 months. Across the U.S. economy, we think that growth in total U.S. consumer spending will be stronger in 2012 than it was in 2011. However, with the U.S. unemployment rate projected to be relatively high in 2011 and gasoline and food costs rising, we expect that consumers will be quite price-sensitive. In many markets, branded companies like P&G will be vying for market share with private label (store brand) products. In our view, this competition, as well as the leverage of large retailers (specifically Walmart for P&G) has often restricted general price increases for household products.

Economic growth and changing lifestyles in developing international markets should provide growth opportunities for this industry. We expect emerging international markets will see rising demand for packaged products that consumers could previously not afford. Companies in the household products areas have relied on product innovation to bolster sales and profit margins. A number of companies continue to control costs effectively and are looking for additional ways to operate more efficiently

5. In the long run, partly

due to the slow growth seen in developed markets, large multinationals will continue to seek growth opportunities in developing and emerging markets. For multinational companies, we expect that the impact of foreign currency translation will depend, in part, on which markets a manufacturer is selling to, and the

extent of currency hedging. The key raw materials that impact the household products sub-industry include natural gas, crude oil, pulp and resin. Year to date through September 19, the Consumer Staples ETF (XLP) was up 4.33%, compared to a 4.25% drop for the S&P 1500 Index. In 2010, the sub-industry index advanced 4.4%, versus a 14.2% rise for the S&P 1500

10.

MARKETS AND COMPETITION

Source

1: Yahoo! Finance

P&G operates in the Cosmetic & Beauty Products Manufacturing, Soap & Cleaning Compound Manufacturing, and Other Converted Paper Product Manufacturing industries which are driven by price and brand awareness. The chart above highlights stock performance of the past year for P&G’s main competitors in these industries including: Colgate-Palmolive, Kimberly-Clark, Church & Dwight, and Energizer Holdings. None of these companies compete with P&G in all of the industries it competes in which makes comparing the companies difficult. Colgate-Palmolive mainly competes in the Soap and Cleaning Compound Manufacturing.

Price to Sales (2011)

Source

1: Yahoo! Finance

Price to sales (P/S) ratio measures how much investors are willing to pay for each dollar of sales. This chart shows the strong marketing companies in the Cosmetic & Beauty Products Manufacturing and Soap & Cleaning

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

6

Compound Manufacturing like Colgate-Palmolive and Church & Dwight are priced at a premium for each dollar of sales compared to Kimberly-Clark who competes strictly in Other Converted Paper Product Manufacturing. P&G is in the middle which makes sense for the different business segments it competes in.

Asset Turnover (2011)

Source: MSN Money

11

Asset turnover measures total sales divided by total assets. It measures how effectively a business is using its assets to generate sales. P&G is at the bottom of its competitors in this metric with a 0.6 value. P&G is the least efficient in asset turnover which is partly explained by the amount of R&D which gets capitalized on its balance sheet.

Operating Margin (2011)

Source

1: Yahoo! Finance

Operating margin is the measure of operating income over total revenues. A higher operating margin indicates a more efficient company allowing it to pay off its fixed costs. The difference in margins across the industry is a direct reflection on the relationships these consumer staple companies have developed with their customers. P&G and Colgate-Palmolive are the leaders in this category. Both companies invest in R&D

to develop new products and create new markets which allow them to establish the first relationship with the customer and also strong market share which allow for high margins on their new products. These new products and the relationship created with the consumer are what drive profitability for both companies. Companies which sell more commoditized products like the paper product offerings from Kimberly-Clark result in a lower margin due to the lack of differentiating factors in product offerings.

Market Share (Cosmetic & Beauty Products Manufacturing in the US)

Source13

: IBISworld.com

It is difficult to measure P&G’s market share against its competitors because it competes in a variety of consumer staple product categories and industries including Cosmetic & Beauty Products Manufacturing, Soap & Cleaning Compound Manufacturing, Other Converted Paper Product Manufacturing, and Pharmaceutical and Medicine Manufacturing. It is safe to say that P&G is by far the largest competitor in each of these industries. P&G uses its size and distribution channels to its advantage by reducing costs from suppliers and using its economies of scale. This is a large advantage when the largest portion of operating costs are from product purchases.

Industry Costs (2010)

Source

5: IBISworld.com

With 58% of costs coming from purchases from suppliers, market share and economies of scale are extremely important for manufacturers in this industry. As the largest manufacturer in the industry P&G takes advantage of its economies of scale to get the best possible price from its suppliers. P&G also focuses on products with long shelf lives in order to buy in bulk and

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

7

store inventory for when it is needed. Management has guided that it intends on streamlining the manufacturing process by using similar inputs for many of its products which will give them greater leverage on suppliers going forward.

The other large portion of costs come from the “other” category and include SG&A. This includes the large marketing budgets of many of these manufacturers as they try to educate consumers about new products and to promote existing products. P&G’s SG&A costs are much higher than the industry average due to the emphasis on marketing and creating a relationship with the consumer.

ECONOMIC OUTLOOK

The recession in the US has been over for more than a year and a half, but there remain strong global economic risks and a fear that we may already be in a “double-dip” recession. High unemployment remains in many developed countries and European default risks also pose strong threats to the global economy.

GDP

Real GDP grew by 1.3% in Q2 2011 growing for the 8th consecutive quarter. We feel real GDP will continue to grow around 1.5% in the next two quarters with a two year forecast of 3.0% average growth/quarter. This sluggish US recovery will continue to affect P&G’s core consumer’s ability to pay for P&G’s premium products.

Source

12: Bureau of Economic Analysis

Unemployment

Unemployment continues to be a concern on the outlook for the US economy. The rate continued to fall in 2010 and stands at 9.1% in September of 2011. This rate can be somewhat misleading because it does not account for all “discouraged workers” who have stopped looking for jobs. The consensus of the Henry Fund is a real unemployment rate around 9.1% for the

next six months dropping to around 8.2% in the next two years. We feel the politicians in Washington will have the political will to pass a bill aimed at creating jobs and infrastructure in the US which will help bring the unemployment rate down. We also feel that if US businesses could gain some political/tax clarity it would lead to accelerated hiring. Many businesses are sitting on their hands waiting for D.C. to finalize financial, healthcare, and tax reforms before making investment/hiring decisions. The high unemployment rate during the recent recession has been a negative for P&G as consumers became more price sensitive and traded down from P&G’s higher end products to private label and off brands. We feel the above average unemployment rate going forward will continue to be negative for P&G as consumers will be more price conscious due to the freshness of the worst recession in recent memory.

Source

13: Bureau of Labor Statistics

Inflation

Inflation has been low throughout the recession and recovery. In 2009 the CPI declined by 0.36% before rising to a moderate 1.64% in 2010. The Henry Fund fears a sharp spike in inflation as energy, grains, and metal prices have increased significantly in 2010 and the beginning of 2011. We expect inflation to rise to 2.3% in the short-term and increasing to 2.8% over the next two years. P&G continues to try to hedge this risk through derivative contracts, but increased input prices continue to be a concern for P&G. P&G uses interest rate swaps, forward currency swaps, and futures/options/swaps on commodities like oil, plastic resin, and other inputs. P&G has tried to maintain margins/prices during this downturn and has realized many consumers are trading down to private label or cheaper brands. We feel P&G will continue to struggle in passing on prices to US consumers if energy and input prices continue to spike.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

8

Source

13: Bureau of Labor Statistics

Consumer Sentiment

Consumer sentiment has plummeted over the summer and is testing its low in November 2008. The latest report of 57.8 for mid-September is a dramatic decrease from the 74.5 May report and slightly above the consensus of 56.0. This decrease in sentiment is due to the continued high unemployment, continued high energy prices, S&P’s downgrade of the US debt, and economic uncertainty in Europe. We feel consumer sentiment will improve to stay within the 65-70 range over the next two years. This increase in consumer sentiment should benefit P&G as consumers become less price sensitive.

Source14

: Bloomberg Economic Calendar

Currency Risk

With products in more than 180 countries, P&G faces significant currency translation risks. P&G attempts to hedge these translation risks using derivatives. It especially manages risk in countries with currency exchange controls like Venezuela, China, and India. We feel the dollar will strengthen against the Euro and Yen in the next two years which will be a negative for P&G as a stronger dollar will result in lower revenues

and earnings for the 63% of revenues that occur outside of the US.

Median Household Income

The median household income continues to remain stagnant as the US economy struggles to grow. With median income at near 1998 levels, the disparity in income continues to be a negative for P&G. This recession has seen the middle class evaporate and with it P&G’s pricing power for its products which are mainly aimed at middle class America. We see continued stagnation in household incomes.

Source

9: Wall Street Journal

CATALYSTS FOR GROWTH

International growth

International growth will be the #1 catalyst for P&G going forward. The US market delivers 37% of the $82.6B in annual sales and an estimated 60% of the $11.8B in profit. P&G estimates US consumers spend $96/year per person compared with $4/year per person in China and $1/year per person in India and Sub-Saharan Africa. As US consumers continue to struggle P&G will have to look to growing economies like the BRICs where the middle classes are starting to demand quality consumer staple products. P&G is already entrenched throughout the world (180 countries), but is phasing in many of its branding/pricing strategies as the discretionary income for the middle class grows. For example, in India P&G introduced a low-cost Mach3 razor which gained 15% market share within the year

3.

As salespeople and marketing continue to educate consumers about P&G’s superior razor products, it decided to launch a more premium product, the Gillette Guard. This strategy allows P&G to test the market’s price sensitivity before launching more risky high-margin products. We see P&G continuing to use this strategy in a wide variety of their product segments in the BRIC countries. BRIC margins will be lower than developed economies as P&G captures market share.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

9

Expanding Product Categories

P&G competes in 38 product categories and, on average, compete in 19 categories in any given country. The US is the most developed market with 35 product categories. In China, Brazil, and India P&G competes in 18-19 categories. Mexico and Russia are in the 20’s. P&G has a goal of raising the average amount of categories in any given country from 19 to 24 by 2016

3.

Joint Venture with Teva Pharmaceuticals

P&G exited the pharmaceuticals business 2 years ago to focus on consumer-oriented healthcare. The joint venture is in negotiations and would give P&G access to: Teva’s manufacturing scale as the largest prescription drug manufacturer in the world, their library of molecules, their regulatory capabilities, and pharmacy coverage in many markets. This would allow both companies to accelerate entry into additional OTC categories and markets. The venture is scheduled to be finalized by the end of 2011

3. P&G realizes their

expertise is in marketing and that they can leverage their distribution channels to be a player to provide OTC medications.

INVESTMENT POSITIVES

P&G is the most well known consumer staple company in the world with strong brands and superior products. Continued innovation leads to new market segments and strong market share in nearly every category P&G competes in.

With 24 brands producing more than $1B in annual sales and 50 leadership brands P&G has strong recurring sales and brand loyalty with much of its customer base.

Growth in the BRIC countries is expected to be strong in the coming 7-10 years as economic growth leads to higher discretionary income for more than 3 billion consumers. 270 million consumers are expected to be added to China’s middle class by 2020. P&G expects to serve 5 billion consumers by 2015.

P&G provides a healthy dividend and share repurchase program to its shareholders. If growth prospects do not end up as rosy as we expect the 3.3% dividend yield and the $7.0B in share buybacks to continue to bring a strong return compared to its peers. We expect P&G to increase their dividend payout ratio to above 53% in 2015 from 47% in 2011.

INVESTMENT NEGATIVES

Walmart accounts for 16% of P&G’s revenues. This threatens margins and pricing power. Walmart can exert an extreme amount of pressure on P&G to continue to make P&G the preferred supplier for consumer staple products. If the US consumer continues to struggle it will be hard for P&G to continue demanding the preferred aisle and shelf placement or Walmart could decide to compete with its own private label products.

With Walmart and P&G in our portfolio we are placing a large bet that these two companies will continue to be “in bed” with one another in the near term. This is an unnecessary risk, especially when we feel uncomfortable with the weakness of the US consumer going forward.

The “hour-glass” pricing strategy is a risky and unproven. Management is executing this strategy after a failed attempt to maintain pricing/branding during the recession. This will cut into margins at a time where management has stated they want to divest “non-core” products/brands which do not have strong margins.

P&G is such a behemoth of a company that it will be difficult for it to “move the needle” with any one new product innovation or establishment of a new market.

Continued weakness in developed economies will test P&G’s margins as the middle class tries to stay afloat. Europe will see continue weakness through 2013.

VALUATION

Our HOLD rating is based on an expected price of $76-$79. This range is given based on the prices for the three valuation techniques used. More weight was given to the DCF/EP model and DDM model when calculating this range because the relative P/E model does not reflect that P&G trades at a higher multiple because of its higher margins. The DCF/EP model produced a price of $90.15 while the DDM produced a price of $62.67 and the relative P/E produced a range of $56.22-$60.28 for 2011 and 2012 estimates.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

10

Revenue growth was modeled as follows in the 6 business segments:

P&G is one of the largest product manufacturers in the world and is not expected to grow faster than a few percentage points based on its sheer size. P&G’s stated goal is 2-3% growth over Household Product industry growth. The growth forecasts were calculated based on management’s stated growth in each segment as well as past performance. The 10% decline in revenues for Snacks and Pet Care is a result of the Pringles divestiture. We envision muted 2012 growth as the developed economies continue was struggle before an uptick in 2013 followed by reasonable growth in 2014-15 to CV. We expect a slight decrease in margins through 2014 as P&G sells more to emerging markets and struggles to pass on costs to US customers. P&G faces a large variety of competitors in a variety of industries including discount retailers, membership warehouses, grocers, and internet retailers. The relative valuation model includes companies from all of these different industries. One thing to note is the inclusion in the first P/E calculation and then subsequent removal of AMZN in a second calculation due to it being an outlier relative to the other companies. Our models assume a risk free rate of 3.25% (30 Yr Treasury rate as of 9/18/2011) a market risk premium of 4.50%, a beta (3 yr monthly) of 0.48, cost of equity (CAPM) of 5.41%, a cost of preferred shares of 15.2%, and an after tax cost of debt of 3.33%. The WACC calculated using these inputs was 5.79%. The continuing value used in the model was a conservative 2.00%. We chose conservative estimates for continuing value because P&G is a very mature company. Cost of sales was modeled using the margins of each segment leading to a specific percentage of sales and is a very sensitive number for a firm with as large of sales as P&G. Cost of Sales along with SG&A expenses were modeled in the sensitivity tables. The

DCF/EP price is fairly sensitive to these costs with a 10% move in the stock when COGS and SG&A are moved 1%. SG&A expenses will vary as P&G launches into new product categories in emerging market countries. We have P&G as a HOLD. However, a few events could trigger us to review our decision: International growth increases significantly. International growth will be the key driver for P&G and an inability to enter some of the new markets through adding product lines would lead to increased organic growth and an appreciation in P&G’s future stock value.

A bounce back or catalyst to spark the middle-class American. A decline in unemployment or increase in median incomes will help P&G’s core customer.

Success in the hour-glass pricing strategy. It seems that helping the consumer trade down to lower margin or lesser quality goods does not align with P&G’s business model because of the intense competition at the low end and the difficulties in passing on price increases once incomes increase. If the volumes and margins end up being higher than expected, P&G’s earnings and stock value will be higher than expected.

A divestment of Walmart in the Henry Fund. With two companies so dependent on one another to succeed, it seems counterintuitive to hold two low beta consumer staple stocks that expose the fund to the same risks. If Walmart was divested, P&G would look more attractive as an investment for the fund in this sector.

Henry Fund Research

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

11

REFERENCES

1. Yahoo! Finance: finance.yahoo.com 2. P&G Unhappy With Walmart Venture’s Execution. Reuters.com. 3. P&G Annual Report 2011. 4. P&G Corporate About Us: http://walmartstores.com/AboutUs/295.aspx 5. IBIS World Industry Overview: www.ibisworld.com 6. Once A Great Flop, Now Sold for Billions. April 5, 2011. The New York Times. http://www.nytimes.com/2011/04/06/business/06pringles.html 7. Net Advantage. Standard & Poor’s Corporate News. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/cp/showDailyNews.do. 8. Procter & Gamble Announces Another Dividend Increase. April 12, 2011. eDividend Stocks.com. http://www.edividendstocks.com/2011/04/procter-gamble-announces-another-dividend-increase/ 9. As Middle Class Shrinks, P&G Aims High and Low. The Wall Street Journal. September 12, 2011. http://online.wsj.com/article/SB10001424053111904836104576558861943984924.html 10. Net Advantage. Standard & Poor’s Industry Review. September 19

th, 2011.

http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/cp/companyIndustryPage.do 11. MSN Money: www.msnmoney.com 12. Bureau of Economic Analysis: www.bea.gov 13. Bureau of Labor Statistics: www.bls.gov 14. Bloomberg Economic Calendar: http://www.bloomberg.com/markets/economic-calendar/

IMPORTANT DISCLAIMER

This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Procter & Gamble Co. (NYS: PG)Revenue Drivers

For the fiscal year ended June 30th

Revenues (Millions) 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Beauty 19,515 18,924 19,491 20,157 20,359 20,969 21,598 22,030

Grooming 8,254 7,408 7,631 8,025 8,186 8,431 8,684 9,031

Health Care 14,578 11,288 11,493 12,033 12,153 12,396 12,706 13,215

Snacks and Pet Care 3,204 3,114 3,135 3,156 2,683 2,817 2,958 3,017

Fabric Care and Home Care 23,714 23,186 23,805 24,837 25,582 26,477 27,801 28,913

Baby Care and Family Care 13,898 14,103 14,736 15,606 15,996 16,636 17,634 18,340

TOTAL 83,163 78,023 80,291 83,814 84,958 87,727 91,382 94,546

Volume growth 2012E 2013E 2014E 2015E

Beauty 2% -2% 3% 4% 1% 3% 3% 2%

Grooming 5% -5% 1% 3% 2% 3% 3% 4%

Health Care 4% -3% 3% 5% 1% 2% 3% 4%

Snacks and Pet Care 3% -6% 1% 1% -15% 5% 5% 2%

Fabric Care and Home Care 6% -3% 6% 7% 3% 4% 5% 4%

Baby Care and Family Care 4% 1% 7% 8% 3% 4% 6% 4%

Earnings (Millions)

Beauty 2,730 2,664 2,712 2,686 2,690 2,720 2,680 2,790

Grooming 1,679 1,359 1,631 1,477 1,529 1,575 1,720 1,810

Health Care 2,506 1,835 1,860 1,796 1,840 1,910 1,940 1,990

Snacks and Pet Care 261 234 326 241 245 235 240 245

Fabric Care and Home Care 3,411 3,032 3,339 3,009 3,020 3,090 3,130 3,240

Baby Care and Family Care 1,728 1,770 2,049 1,978 2,020 2,110 2,340 2,580

TOTAL 12,315 10,894 11,917 11,187 11,344 11,640 12,050 12,655

Margin

Beauty 13.99% 14.08% 13.91% 13.33% 13.21% 12.97% 12.41% 12.66%

Grooming 20.34% 18.35% 21.37% 18.40% 18.68% 18.68% 19.81% 20.04%

Health Care 17.19% 16.26% 16.18% 14.93% 15.14% 15.41% 15.27% 15.06%

Snacks and Pet Care 8.15% 7.51% 10.40% 7.64% 9.13% 8.34% 8.11% 8.12%

Fabric Care and Home Care 14.38% 13.08% 14.03% 12.11% 11.81% 11.67% 11.26% 11.21%

Baby Care and Family Care 12.43% 12.55% 13.90% 12.67% 12.63% 12.68% 13.27% 14.07%

TOTAL 14.81% 13.96% 14.84% 13.35% 13.35% 13.27% 13.19% 13.39%

Procter & Gamble Co. (NYS: PG)Assumptions

Current Price $61.84

Balance sheet Income statement 2012E 2013E 2014E 2015E

Normal cash 3.00% of sales Cost of products sold 50.65% 50.82% 50.93% 50.72%

Accounts receivable 7.35% of sales Selling, general & administrative expense 29.80% of sales

Total inventories 7.65% of sales Tax rate (10K) 22.30%

Prepaid expenses & other current assets 4.50% of sales Interest expense 4.28% Total debt

Property, plant & equipment at cost 5.50% growth Other expenses 0.50% of sales

Accumulated depreciation 6.00% growth Preferred Dividends 0.25% of sales

Net property, plant & equipment 5.50% growth

Goodwill 57,562 Constant

Trademark & other intangible assets, net 32,620 Constant

Other non-current assets 5.25% of sales Other

Accounts payable 8.50% of sales Risk-free rate (30 yr treasury) 3.25%

Marketing & promotion 3.65% of sales Risk premium 4.50%

Accrued compensation 2.15% of sales Beta (3 yr monthly) 0.48

Taxes payable 1.50% of sales Cost of Equity (CAPM) 5.41%

Accrued & other liabilities 4.25% of sales YTM on 2034 bonds (mkt) 4.28%

Current portion of long-term debt Taken from 10K Cost of Debt (post-tax) 3.33%

Long-term debt 10.0% of non-cash assets Cost of Preferred 15.20%

Deferred income taxes 1,986 to zero WACC 5.79%

Pension benefits & Other postretirement benefits 7.50% of sales Short term investment interest rate (2 yr t-bill) 0.16%

Unrecognized tax benefits 2326 Constant CV growth rate 2.00%

Other non-current liabilities 1.6% of sales CV ROIC 20.79%

Convertible class A preferred stock -70 per year CV ROE 16.40%

ESOP exercises 937 Constant

Reserve for ESOP debt retirement -1,357 Constant

Accumulated other comprehensive income (loss) -2,054 Constant

Treasury stock, at cost 4000 increase/year

Noncontrolling interest 361 Constant

Commercial Paper 125% Inventory

Procter & Gamble Co. (NYS: PG)As Reported Annual Income Statement (Millions)

For the fiscal year ended June 30th

Exchange rate used is that of the Year End reported date

Year 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Net sales 83,503 79,029 78,938 82,559 84,958 87,727 91,382 94,546

Cost of products sold 40,695 38,898 37,919 40,768 43,031 44,583 46,541 47,954

Selling, general & administrative expense 25,725 24,008 24,998 25,973 25,318 26,143 27,232 28,175

Operating income (loss) 17,083 16,123 16,021 15,818 16,609 17,001 17,609 18,418

Interest expense 1,467 1,358 946 831 1122 1061 1104 1081

Other non-operating income (expense), net 462 560 -28 202 425 439 457 473

Earnings (loss) from continuing operations before taxes 16,078 15,325 15,047 15,189 15,063 15,502 16,049 16,863

Total current provision (benefit) for income taxes 2,789 3,436 4,065 3,263 3,359 3,457 3,579 3,761

Total deferred income tax provisions (benefits) 1,214 596 36 129 - - - -

Income taxes 4,003 4,032 4,101 3,392 3,359 3,457 3,579 3,761

Net earnings (loss) 12,075 13,436 12,736 11,797 11,704 12,045 12,470 13,103

Preferred dividends, net of tax benefit 176 192 219 233 212 219 228 236

Net earnings (loss) to common 11,899 13,244 12,517 11,564 11,491 11,826 12,241 12,867

Year end shares outstanding 3,033 2,917 2,843 2,766 2,757 2,753 2,752 2,755

Net earnings (loss) per share-basic $3.86 $4.49 $4.32 $4.12 $4.17 $4.30 $4.45 $4.67

Dividends per common share $1.45 $1.64 $1.80 $1.97 $2.15 $2.25 $2.35 $2.48

Payout ratio 37.56% 36.53% 41.67% 47.82% 51.59% 52.38% 52.84% 53.11%

Procter & Gamble Co. (NYS: PG)As Reported Annual Balance Sheet (Millions)

For the fiscal year ended June 30th

Exchange rate used is that of the Year End reported date

Year 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Cash & cash equivalents 3,313 4,781 2,879 2,768 5,952 2,435 3,276 2,843

Accounts receivable 6,761 5,836 5,335 6,275 6,244 6,448 6,717 6,949

Total inventories 8,416 6,880 6,384 7,379 6,499 6,711 6,991 7,233

Prepaid expenses & other current assets 3,785 3,199 3,194 4,408 3,823 3,948 4,112 4,255

Total current assets 22,503 20,696 17,792 20,830 22,519 19,542 21,096 21,280

Property, plant & equipment at cost 38,086 36,651 37,012 41,507 43,790 46,198 48,739 51,420

Accumulated depreciation 17,446 17,189 17,768 20,214 21,427 22,712 24,075 25,520

Net property, plant & equipment 20,640 19,462 19,244 21,293 22,363 23,486 24,664 25,900

Net goodwill & other intangible assets 94,000 89,118 85,648 90,182 90,182 90,182 90,182 90,182

Other non-current assets 4,837 4,348 4,498 4,909 4,460 4,606 4,798 4,964

Total assets 141,980 133,624 127,182 137,214 139,525 137,816 140,739 142,325

Accounts payable 6,775 5,980 7,251 8,022 7,221 7,457 7,767 8,036

Marketing & promotion 2,760 2,378 2,857 3,058 3,101 3,202 3,335 3,451

Accrued compensation 1,527 1,464 1,822 1,874 1,827 1,886 1,965 2,033

Taxes payable 945 722 622 786 1,274 1,316 1,371 1,418

Accrued & other liabilities 5,610 3,926 3,258 3,572 3,611 3,728 3,884 4,018

Current portion of long-term debt 1,746 6,941 564 2,994 3,839 2,229 3,021 2,300

Commercial paper 11,338 9,379 7,908 6,987 7,844 6,244 6,448 6,717

Total current liabilities 30,958 30,901 24,282 27,293 28,717 26,063 27,791 27,973

Current portion of long-term debt 1,746 6,941 564 2,994 3,839 2,229 3,021 2,300

Long-term debt 23,581 20,652 21,360 22,033 22,375 22,556 22,765 22,966

Deferred income taxes 9,793 9,543 9,912 9,930 7,944 5,958 3,972 1,986

Pension benefits & Other postretirement benefits 3,658 5,314 6,616 6,275 6,372 6,580 6,854 7,091

Unrecognized tax benefits - 2,705 2,381 2,326 2,326 2,326 2,326 2,326

Other non-current liabilities 4,496 1,408 1,192 1,356 1,359 1,404 1,462 1,513

Total liabilities 72,486 70,523 65,743 69,213 69,094 64,886 65,169 63,855

Convertible class A preferred stock 1,366 1,324 1,277 1,234 1,164 1,094 1,024 954

Common stock 64,309 65,125 65,705 66,413 67,350 68,288 69,225 70,162

Reserve for ESOP debt retirement -1,325 -1,340 -1,350 -1,357 -1,357 -1,357 -1,357 -1,357

Accumulated other comprehensive income (loss) 3,746 -3,358 -7,822 -2,054 -2,054 -2,054 -2,054 -2,054

Treasury stock, at cost 47,588 55,961 61,309 67,278 71,278 75,278 79,278 83,278

Retained earnings (accumulated deficit) 48,986 57,309 64,614 70,682 76,245 81,876 87,649 93,682

Noncontrolling interest - - 324 361 361 361 361 361

Total shareholders' equity (deficit) 69,494 63,099 61,439 68,001 70,431 72,930 75,570 78,470

Total Liabilities and Owner's Equity 141,980 133,622 127,182 137,214 139,525 137,816 140,739 142,325

Procter & Gamble Co. (NYS: PG)As Reported Annual Cash Flow Statement (Millions)

For the fiscal year ended June 30th

Exchange rate used is that of the Year End reported date

Year 2008 2009 2010 2011

Cash & cash equivalents, beginning of year 5,354 3,313 4,781 2,879

Net earnings (loss) 12,075 13,436 12,736 11,797

Depreciation & amortization 3,166 3,082 3,108 2,838

Share-based compensation expense 555 516 453 414

Deferred income taxes 1,214 596 36 128

Loss (gain) on sale of business - -2,377 -2,670 -203

Accounts receivable 432 415 -14 -426

Inventories -1,050 721 86 -501

Accounts payable, accrued & other liabilities 134 -742 2,446 358

Other operating assets & liabilities -1,239 -758 -305 -1,190

Other operating activities 527 30 196 16

Net cash flows from operating activities 15,814 14,919 16,072 13,231

Capital expenditures -3,046 -3,238 -3,067 -3,306

Proceeds from asset sales 928 1,087 3,068 225

Acquisitions, net of cash acquired -381 -368 -425 -474

Change in investments -50 166 -173 73

Net cash flows from investing activities -2,549 -2,353 -597 -3,482

Dividends to shareholders -4,655 -5,044 -5,458 -5,767

Change in short-term debt 1,844 -2,420 -1,798 151

Additions to long-term debt 7,088 4,926 3,830 1,536

Reductions of long-term debt -11,747 -2,587 -8,546 -206

Treasury stock purchases -10,047 -6,370 -6,004 -7,039

Impact of stock options & other financing activities 1,867 681 721 1,302

Net cash flows from financing activities -15,650 -10,814 -17,255 -10,023

Effect of exchange rate changes on cash & cash equivalents 344 -284 -122 163

Change in cash & cash equivalents -2,041 1,468 -1,902 -111

Cash & cash equivalents, end of year 3,313 4,781 2,879 2,768

Cash payments for: interest 1,373 1,226 1,184 806

Cash payments for: income taxes 3,499 3,248 4,175 2,992

Procter & Gamble Co. (NYS: PG)Cash Flow Statement (Millions) 2012E 2013E 2014E 2015E

Net Income 11,704 12,045 12,470 13,103

Depreciation 1,213 1,286 1,363 1,445

Accounts receivable 31 -204 -269 -233

Total inventories 880 -212 -280 -242

Prepaid expenses & other current assets 585 -125 -164 -142

Other non-current assets 449 -145 -192 -166

Accounts payable -801 235 311 269

Taxes payable 488 42 55 47

Marketing & Promotion 43 101 133 115

Accrued Compensation -47 60 79 68

Accrued & other liabilities 39 118 155 134

Deferred income taxes -1,986 -1,986 -1,986 -1,986

Other non-current liabilities 3 44 58 51

Pension and other LT benefits 97 208 274 237

Cash from operating activities 12,697 11,467 12,007 12,701

Property, plant & equipment at cost -2,283 -2,408 -2,541 -2,681

Cash from investing activities -2,283 -2,408 -2,541 -2,681

Commercial Paper 857 -1,599 204 269

Current portion of long-term debt 845 -1,610 792 -721

Long-term debt 342 181 208 202

Convertible class A preferred stock -70 -70 -70 -70

Common stock 937 937 937 937

Dividends paid -5,928 -6,194 -6,468 -6,833

Preferred dividends paid -212 -219 -228 -236

Share repurchases -4,000 -4,000 -4,000 -4,000

Cash from financing activities -7,229 -12,575 -8,626 -10,453

Beginning cash 2,768 5,952 2,435 3,276

Change in cash 3,184 -3,517 841 -433

Ending cash 5,952 2,435 3,276 2,843

Procter & Gamble Co. (NYS: PG)As Reported Annual Balance Sheet (Millions)

For the fiscal year ended June 30th

Year 2008 2009 2010 2011 Average 2012E 2013E 2014E 2015E

Cash & cash equivalents 3.97% 6.05% 3.65% 3.35% 5.64% 7.01% 2.78% 3.59% 3.01%

Investment securities 0.27% - - - 0.73% 0.00% 0.00% 0.00% 0.00%

Accounts receivable 8.10% 7.38% 6.76% 7.60% 7.82% 7.35% 7.35% 7.35% 7.35%

Total inventories 10.08% 8.71% 8.09% 8.94% 8.99% 7.65% 7.65% 7.65% 7.65%

Prepaid expenses & other current assets 4.53% 4.05% 4.05% 5.34% 4.42% 4.50% 4.50% 4.50% 4.50%

Total current assets 26.95% 26.19% 22.54% 25.23% 28.00% 26.51% 22.28% 23.09% 22.51%

Property, plant & equipment at cost 45.61% 46.38% 46.89% 50.28% 46.88% 51.54% 52.66% 53.34% 54.39%

Accumulated depreciation 20.89% 21.75% 22.51% 24.48% 21.45% 25.22% 25.89% 26.35% 26.99%

Net property, plant & equipment 24.72% 24.63% 24.38% 25.79% 25.43% 26.32% 26.77% 26.99% 27.39%

Goodwill 71.57% 71.51% 68.42% 69.72% 72.71% 67.75% 65.61% 62.99% 60.88%

Trademark & other intangible assets, net 41.00% 41.26% 40.08% 39.51% 42.54% 38.40% 37.18% 35.70% 34.50%

Other non-current assets 5.79% 5.50% 5.70% 5.95% 5.62% 5.25% 5.25% 5.25% 5.25%

Total assets 170.03% 169.08% 161.12% 166.20% 174.30% 164.23% 157.10% 154.01% 150.54%

Accounts payable 8.11% 7.57% 9.19% 9.72% 8.21% 8.50% 8.50% 8.50% 8.50%

Marketing & promotion 3.31% 3.01% 3.62% 3.70% 3.40% 3.65% 3.65% 3.65% 3.65%

Accrued compensation 1.83% 1.85% 2.31% 2.27% 2.04% 2.15% 2.15% 2.15% 2.15%

Taxes payable 1.13% 0.91% 0.79% 0.95% 2.19% 1.50% 1.50% 1.50% 1.50%

Accrued & other liabilities 6.72% 4.97% 4.13% 4.33% 9.97% 4.25% 4.25% 4.25% 4.25%

Current portion of long-term debt 2.09% 8.78% 0.71% 3.63% 3.56% 4.52% 2.54% 3.31% 2.43%

Commercial paper 13.58% 11.87% 10.02% 8.46% 11.27% 9.23% 7.12% 7.06% 7.10%

Total current liabilities 37.07% 39.10% 30.76% 33.06% 34.91% 33.80% 29.71% 30.41% 29.59%

Notes 26.12% 31.21% 24.89% 27.59% 24.39% 0.00% 0.00% 0.00% 0.00%

Capital lease obligations 0.49% 0.50% 0.51% 0.49% 0.62% 0.00% 0.00% 0.00% 0.00%

All other long-term debt 3.72% 3.21% 2.38% 2.23% 3.83% 0.00% 0.00% 0.00% 0.00%

Current portion of long-term debt 2.09% 8.78% 0.71% 3.63% 3.56% 4.52% 2.54% 3.31% 2.43%

Long-term debt 28.24% 26.13% 27.06% 26.69% 31.90% 26.34% 25.71% 24.91% 24.29%

Deferred income taxes 11.73% 12.08% 12.56% 12.03% 12.93% 9.35% 6.79% 4.35% 2.10%

Pension benefits & Other postretirement benefits 4.38% 6.72% 8.38% 7.60% 5.97% 7.50% 7.50% 7.50% 7.50%

Unrecognized tax benefits - 3.42% 3.02% 2.82% 3.09% 2.74% 2.65% 2.55% 2.46%

Other non-current liabilities 5.38% 1.78% 1.51% 1.64% 4.69% 1.60% 1.60% 1.60% 1.60%

Total liabilities 86.81% 89.24% 83.28% 83.83% 90.50% 81.33% 73.96% 71.32% 67.54%

Convertible class A preferred stock 1.64% 1.68% 1.62% 1.49% 1.73% 1.37% 1.25% 1.12% 1.01%

Common stock 77.01% 82.41% 83.24% 80.44% 55.69% 79.27% 77.84% 75.75% 74.21%

Reserve for ESOP debt retirement -1.59% -1.70% -1.71% -1.64% -0.51% -1.60% -1.55% -1.48% -1.44%

Accumulated other comprehensive income (loss) 4.49% -4.25% -9.91% -2.49% -2.02% -2.42% -2.34% -2.25% -2.17%

Treasury stock, at cost 56.99% 70.81% 77.67% 81.49% 64.64% 83.90% 85.81% 86.75% 88.08%

Retained earnings (accumulated deficit) 58.66% 72.52% 81.85% 85.61% 67.60% 89.74% 93.33% 95.92% 99.09%

Noncontrolling interest - - 0.41% 0.44% 0.42% 0.42% 0.41% 0.40% 0.38%

Total shareholders' equity (deficit) 83.22% 79.84% 77.83% 82.37% 83.80% 82.90% 83.13% 82.70% 83.00%

Total Liabilities and Owner's Equity 170.03% 169.08% 161.12% 166.20% 174.30% 164.23% 157.10% 154.01% 150.54%

Procter & Gamble Co. (NYS: PG)As Reported Annual Income Statement (Millions)

For the fiscal year ended June 30th

Year 2008 2009 2010 2011 Average 2012E 2013E 2014E 2015E

Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of products sold 48.73% 49.22% 48.04% 49.38% 48.65% 50.65% 50.82% 50.93% 50.72%

Selling, general & administrative expense 30.81% 30.38% 31.67% 31.46% 31.36% 29.80% 29.80% 29.80% 29.80%

Operating income (loss) 20.46% 20.40% 20.30% 19.16% 19.99% 19.55% 19.38% 19.27% 19.48%

Interest expense 1.76% 1.72% 1.20% 0.00% 1.34% 1.32% 1.21% 1.21% 1.14%

Other non-operating income (expense), net 0.55% 0.71% -0.04% 1.01% 0.56% 0.50% 0.50% 0.50% 0.50%

Earnings (loss) from continuing operations before taxes 19.25% 19.39% 19.06% 18.40% 18.92% 17.73% 17.67% 17.56% 17.84%

Total current provision (benefit) for income taxes 3.34% 4.35% 5.15% 3.95% 4.63% 3.95% 3.94% 3.92% 3.98%

Total deferred income tax provisions (benefits) 1.45% 0.75% 0.05% 0.16% 0.43% - - - -

Income taxes 4.79% 5.10% 5.20% 4.11% 5.06% 3.95% 3.94% 3.92% 3.98%

Net earnings (loss) 14.46% 17.00% 16.13% 14.29% 14.69% 13.78% 13.73% 13.65% 13.86%

Preferred dividends, net of tax benefit 0.21% 0.24% 0.28% 0.28% 0.24% 0.25% 0.25% 0.25% 0.25%

Net earnings (loss) to common 14.25% 16.76% 15.86% 14.01% 14.84% 13.53% 13.48% 13.40% 13.61%

Procter & Gamble Co. (NYS: PG)Weighted Average Cost of Capital (WACC) Estimation

Risk-free rate (30 yr treasury) 3.25%

Risk premium 4.50%

Beta (3 yr monthly) 0.48

Cost of Equity (CAPM) 5.41%

YTM on 2034 bonds (mkt) 4.28%

Marginal Tax Rate 22.30%

Cost of Debt 3.33%

MV Debt 31,302

PV operating leases 1,274

MV Equity 171,033

Preferred Shares outstanding 1,234

Price of Preferred (from 2011 Annual Report page 65) 12.96$

MV of Preferred 15,993

Preferred Dividend 1.97$

Cost of Preferred 15.20%

Total Capital (D+E+P) 219,602

Debt/Equity 0.167

Weight of Equity 77.9%

Weight of Debt 14.3%

Weight of Preferred 7.3%

WACC 5.79%

Procter & Gamble Co. (NYS: PG)Value Drivers

EBITA: 2008 2009 2010 2011 2012 2013 2014 2015

Operating Revenues before taxes 83,503 79,029 78,938 82,559 84,958 87,727 91,382 94,546

COGS 40,695 38,898 37,919 40,768 43,031 44,583 46,541 47,954

SG&A 25,725 24,008 24,998 25,973 25,318 26,143 27,232 28,175

Depreciation & Amortization 3,166 3,082 3,108 2,838 2,627 2,772 2,924 3,085

EBITA 13,917 13,041 12,913 12,980 13,982 14,230 14,685 15,332

Income Tax Provision 4,003 4,032 4,101 3,392 3,359 3,457 3,579 3,761

Tax Rate 22% 22% 22% 22% 22% 22% 22% 22%

Interest expense 1,467 1,358 946 831 1,122 1,061 1,104 1,081

Other non-operating income (expense), net 462 560 -28 202 425 439 457 473

Adjusted Taxes (net) 4,106 4,157 4,095 3,437 3,454 3,555 3,681 3,866

Less Total Adjusted Taxes 4,106 4,157 4,095 3,437 3,454 3,555 3,681 3,866

Add: Change in Deferred Taxes 250 -369 -18 1,986 1,986 1,986 1,986 1,986

NOPLAT 10,061 8,515 8,800 11,529 12,514 12,661 12,990 13,452

Invested Capital

Cash & cash equivalents (3% of sales) 2,505 2,371 2,368 2,477 2,549 2,435 2,741 2,836

Receivables, net 6,761 5,836 5,335 6,275 6,244 6,448 6,717 6,949

Inventories 8,416 6,880 6,384 7,379 6,499 6,711 6,991 7,233

Prepaid expenses & other current assets 3,785 3,199 3,194 4,408 3,823 3,948 4,112 4,255

Total operating current assets 21,467 18,286 17,281 20,539 19,116 19,542 20,561 21,273

Operating Current Liabilities

Accounts payable 6,775 5,980 7,251 8,022 7,221 7,457 7,767 8,036

Marketing & Promotion 2,760 2,378 2,857 3,058 3,101 3,202 3,335 3,451

Accrued compensation 1,527 1,464 1,822 1,874 1,827 1,886 1,965 2,033

Taxes payable 945 722 622 786 1,274 1,316 1,371 1,418

Accrued & other liabilities 5,610 3,926 3,258 3,572 3,611 3,728 3,884 4,018

Total operating Current Liabilities 17,617 14,470 15,810 17,312 17,034 17,589 18,322 18,956

Net Operating Working Capital 3,850 3,816 1,471 3,227 2,081 1,953 2,239 2,316

ADD: net PPE 20,640 19,462 19,244 21,293 22,363 23,486 24,664 25,900

ADD: net capital leases 407 392 401 407 0 0 0 0

ADD: PV of Operating Leases 1,344 1,418 1,496 1,578 1,665 1,756 1,853 1,955

ADD: Trademark & other intangible assets 34,233 32,606 31,636 32,620 32,620 32,620 32,620 32,620

ADD: Other non-current assets 4,837 4,348 4,498 4,909 4,460 4,606 4,798 4,964

SUBTRACT: Other non-current liabilities 4,496 1,408 1,192 1,356 1,359 1,404 1,462 1,513

TOTAL INVESTED CAPITAL 60,815 60,634 57,554 62,678 61,830 63,017 64,711 66,242

Core Value Drivers

Return on Invested Capital (ROIC)

Invested Capital 60,815 60,634 57,554 62,678 61,830 63,017 64,711 66,242

NOPLAT 10,061 8,515 8,800 11,529 12,514 12,661 12,990 13,452

Beginning Invested Capital 60,815 60,634 57,554 62,678 61,830 63,017 64,711

ROIC (NOPLAT/Beginning Invested Capital - 14.00% 14.51% 20.03% 19.97% 20.48% 20.61% 20.79%

Free Cash Flow (FCF)

NOPLAT 10,061 8,515 8,800 11,529 12,514 12,661 12,990 13,452

Change in Invested Capital -181 -3,080 5,124 -847 1,187 1,694 1,531

FCF (NOPLAT - Change in Invested Capital 10,061 8,696 11,880 6,405 13,362 11,474 11,296 11,921

Economic Profit (EP)

Beginning Invested Capital 60,815 60,634 57,554 62,678 61,830 63,017 64,711

ROIC - 14.00% 14.51% 20.03% 19.97% 20.48% 20.61% 20.79%

WACC 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79%

EP (Beginning Invested Capital * (ROIC-WACC) 4,994 5,290 8,197 8,885 9,081 9,341 9,706

Procter & Gamble Co. (NYS: PG)Discounted Cash Flow (DCF) and Economic Profit (EP) Model Valuation

Assumptions: CV growth 2.00%

CV ROIC 20.79%

WACC 5.79%

Cost of Equity 5.41%

2012E 2013E 2014E 2015E CV

DCF Model Discount Periods 1 2 3 3

Free Cash Flow 13,362 11,474 11,296 320,796

PV 12,630 10,252 9,541 270,954

Total 303,378

Plus: Excess Cash 291

Minus: PV Debt 32,014

Minus: PV of ESOP 4,968

Minus: Underfunded Pension 6,275

Minus: Preferred 15,993

PV of Equity 244,420

Shares outstanding 2,766

Price 88.37$

Today's Price 90.15$

Discount Periods 1 2 3 3

EP Model ROIC 19.97% 20.48% 20.61% 20.79%

EP 8,885 9,081 9,341 256,085

PV of EP 8,399 8,114 7,890 216,297

Total 240,700

Beg. Invested Capital 62,678

Plus: Excess Cash 291

Minus: PV Debt 32,014

Minus: PV of ESOP 4,968

Minus: Underfunded Pension 6,275

Minus: Preferred 15,993

PV of Equity 244,420

Shares outstanding 2,766

Target Price 88.37$

Today's Price 90.15$

Procter & Gamble Co. (NYS: PG)Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

2012E 2013E 2014E 2015E CV

EPS 4.17$ 4.30$ 4.45$ 4.67$

Key Assumptions

CV growth 2.00%

CV ROE 16.40%

Cost of Equity 5.41%

Discount period 1 2 3 4

Dividends Per Share 2.15 2.25 2.35 2.48

Future Cash Flows - - - 72.73

Discounted Cash Flows 2.15$ 2.02$ 2.01$ 57.75$

Intrinsic Value 62.67$

Procter & Gamble Co. (NYS: PG)Relative P/E Analysis

EPS EPS Est. Price/Ticker Company Price 2011E 2012E P/E 11 P/E 12 5yr Gr. Revenue

JNJ Johnson & Johnson 63.64$ $4.97 $5.29 12.8 12.0 5.58 1.09

KMB Kimberly Clark 67.23$ $4.86 $5.27 13.8 12.8 7.30 1.31

CL Colgate-Palmolive 88.96$ $5.07 $5.57 17.5 16.0 8.96 2.73

CHD Church & Dwight Co. 42.17$ $2.18 $2.39 19.3 17.6 11.40 2.33AVP Avon Products 21.10$ $2.05 $2.29 10.3 9.2 11.00 0.83

ENR Energizer Holdings 68.97$ $5.32 $6.32 13.0 10.9 9.60 1.09

Average 14.5 13.1 8.97 1.56

PG Proctor & Gamble 61.84$ $ 4.17 $ 4.30 14.8 14.4 11.26% 2.09

Implied Value: Relative P/E (EPS11) $ 60.28

Relative P/E (EPS12) 56.22$

Relative Price/Revenue 46.26$

Procter & Gamble Co. (NYS: PG)Sensitivity Analysis

Current price $64.33

Target price 90.15$

CV growth

90.15$ 1.50% 1.75% 2.00% 2.25% 2.50%

5.19% 97.53 103.83 111.12 119.64 129.75

5.39% 91.40 96.94 103.30 110.68 119.33

5.59% 85.87 90.77 96.36 102.78 110.25

5.79% 80.85 85.21 90.15 95.78 102.27

WACC 5.99% 76.28 80.18 84.56 89.53 95.21

6.29% 70.14 73.45 77.15 81.31 86.01

6.49% 66.46 69.45 72.77 76.48 80.65

6.69% 63.06 65.76 68.75 72.08 75.80

CV growth

90.15$ 1.50% 1.75% 2.00% 2.25% 2.50%

16.79% 79.17 83.13 87.61 92.73 98.62

18.79% 80.10 84.28 89.02 94.42 100.64

CV ROIC 20.79% 80.85 85.21 90.15 95.78 102.27

22.79% 81.47 85.98 91.08 96.91 103.62

24.79% 81.99 86.62 91.86 97.85 104.74

Beta

90.15$ 0.08 0.28 0.48 0.68 0.88

27.80% 102.90 103.24 103.57 103.90 104.24

28.80% 96.23 96.55 96.86 97.17 97.48

SG&A 29.80% 89.56 89.86 90.15 90.44 90.72

30.80% 83.63 83.90 84.18 84.45 84.72

31.80% 77.95 78.21 78.47 78.72 78.97

Cost of Sales (CV)

90.15$ 48.72% 49.72% 50.72% 51.72% 52.72%

27.80% 115.65 109.61 103.57 97.53 91.50

28.80% 108.93 102.90 96.86 90.82 84.78

SG&A 29.80% 102.22 96.19 90.15 84.11 78.07

30.80% 96.26 90.22 84.18 78.14 72.10

31.80% 90.54 84.50 78.47 72.43 66.39

Procter & Gamble Co. (NYS: PG)Ratios & sanity checks

Historical Forecast

Liquidity ratios 2011 2012E 2013E 2014E 2015E

Current ratio: (Current assets/current liabilities) 0.763 0.784 0.750 0.759 0.761

Quick ratio: ((Cash + ST invest + A/R)/Current liabilities) 0.331 0.425 0.341 0.360 0.350

Activity ratios

Receivables Turnover: (Net sales/Avg A/R) 3.556 3.393 3.456 3.471 3.459

Inventory turnover: (COGS/Avg inventory) 5.924 6.201 6.750 6.793 6.743

Asset turnover: (Net sales/Avg total assets) 0.602 0.609 0.637 0.649 0.664

Financial leverage ratios

Interest coverage: (EBIT/interest) 19.03 14.80 16.03 15.96 17.03

Debt to equity: (LT debt/equity) 0.324 0.318 0.309 0.301 0.293

Debt to assets: (LT debt/assets) 0.161 0.160 0.164 0.162 0.161

Profitability ratios

Gross profit margin: ((Revenue - COGS)/Revenue) 50.62% 49.35% 49.18% 49.07% 49.28%

ROA: (Net income/total assets) 8.43% 8.24% 8.58% 8.70% 9.04%

Payout policy

Dividend payout: (Dividend/net income) 47.82% 51.59% 52.38% 52.84% 53.11%

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol PG

Current Stock Price $61.84

Risk Free Rate 3.25%

Current Dividend Yield 3.40%

Annualized St. Dev. of Stock Returns 21.00%

Average Average B-S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 363 51.75 5.30 13.68$ 4,968$

Total 363 51.75$ 5.30 21.06$ 4,968$

Procter & Gamble Co. (NYS: PG)Operating and Capital Lease Obligations

Capital Operating

Years Ended January 31, Leases Leases

2012 46 264

2013 44 224

2014 45 192

2015 25 173

2016 25 141

Thereafter 197 505

Total Minimum Payments 382 1499

Less: Interest 225

PV of Minimum Payments 1273.8

Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.28%

Number Years Implied by Year 6 Payment 2

Lease PV Lease

Year Commitment Payment

1 264 253.2

2 224 206.0

3 192 169.3

4 173 146.3

5 141 114.3

6 & beyond 252.5 384.7

PV of Minimum Payments 1273.8

Procter & Gamble Co. (NYS: PG)Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 363

Average Time to Maturity (years): 5.30

Expected Annual Number of Options Exercised: 69

Current Average Strike Price: 51.75$

Cost of Equity: 5.41%

Current Stock Price: 52.07$

2012E 2013E 2014E 2015E

Increase in Shares Outstanding: 69 69 69 69

Average Strike Price: 51.75$ 54.55$ 57.50$ 60.61$

Increase in Common Stock Account: 3.55 3.74 3.94 4.15

Change in Treasury Stock 4,000 4,000 4,000 4,000

Expected Price of Repurchased Shares: 52.07$ 54.89$ 57.86$ 60.99$

Number of Shares Repurchased: 76.82 72.88 69.14 65.59

Shares Outstanding (beginning of the year) 2,766 2,757 2,753 2,752

Plus: Shares Issued Through ESOP 69 69 69 69

Less: Shares Repurchased in Treasury 77 73 69 66

Shares Outstanding (end of the year) 2,757 2,753 2,752 2,755