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Smart Investor: is Reckitt Benckiser a 'buy'?

Can a company that sells generic goods such as headache pills and dishwasher powder justify a premium valuation? Smart Investor gives his verdict.

 
Smart Investor: is Reckitt Benckiser a 'buy'?

FTSE 100-listed Reckitt Benckiser (RB.L) owns a wide variety of brands with which many readers will be familiar.

Its business can be split into three main areas: health, hygiene and home. Among its stable of 19 ‘powerbrands’ are consumer favourites such as Nurofen, Gaviscon, Strepsils, Finish, Cillit, Harpic and Vanish.

Its history goes back to 1823, when Johann Benckiser founded Benckiser, whose core business was derived from industrial chemicals. Meanwhile, the Reckitt side was founded in Hull in 1840, with the company becoming renowned for starch as well as washing blue and black lead for polishing.

The two companies gradually expanded their product ranges and geographical spread until they merged in 1999. Today, the merged company employs about 38,000 people across the globe and, with a market capitalisation of £27 billion, is the 19th-biggest UK listed company.

Performance review

The past five years have been highly successful for Reckitt Benckiser, with the company making a net profit in all five and managing to grow the bottom line at an annualised rate of 16.8%.

Although the vast majority of its products are consumer staples and demand for them tends to be relatively strong no matter what the economic circumstances, such growth is still very impressive given the difficult trading conditions of recent years.

Furthermore, return on equity (ROE) has averaged 34% over the five-year period, hitting 30% last year. What makes the ROE figure all the more attractive is the fact that it has stayed in a fairly narrow range over the period, with the range being between 30% and 39%.

This makes future returns far more predictable than if the figures has been up and down.

Yield

Meanwhile, shares currently yield 3.3% from a payout ratio of 52.7%. This is a tad disappointing, and it could reasonably be argued that a mature company in a mature market should be paying a higher proportion of profits out as dividends. 

Of course, dividends have increased in each of the past four years, growing at an annualised rate of 22.8%. This bodes well for income seekers since, although the yield is not index leading, dividend growth should make the yield more attractive in time.

Financial soundness

As for the financial soundness of Reckitt Benckiser, a debt-to-equity ratio of 44% and interest cover of 77 confirm that it is only moderately geared and that debt is adequately serviced. This not only offers encouragement to investors, but highlights just how impressive the ROE figures are.

In addition, the company benefits from a sizeable economic moat. Of course, ibuprofen tablets, throat sweets and dishwasher powder cannot be patented, but they do command substantial brand loyalty from consumers. This is crucial as a number of competitors produce almost identical (and in some cases identical) goods. Therefore, it must differentiate its products in order to avoid competing solely on price.

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4 comments so far. Why not have your say?

dan cahill

Oct 30, 2012 at 12:11

This is the kind of company that is a good basis for any portfolio, Not very exciting but sound and dependable for today's conditions.

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Sinic

Oct 30, 2012 at 13:38

Absolutely right Dan; it is one of the stalwarts in my portfolio along with the likes of Diageo, Vodaphone, Shell, GSK. Not too exciting but reliable in their and my maturity

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Mel

Oct 31, 2012 at 09:42

Thank to Dan and Sinic I am a new to this so it all helps.

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Jerry Jones

Nov 04, 2012 at 12:08

Dividend growth - I have just had a bit of a play with the numbers to tset the theory:

5 years ago this share was at 2740, so 10 grand invested then would have bought you 365 shares. 2011's dividend from them would be £1.25 per share, so £456. I can see how over the long term this is a good income play, ignoring the capital appreciation from 2740 to 3790 (38%).

If we run it over the last 10 years it gets better. In 2002 the share was at 1153 so you could have got 867 shares, which would now be yielding £1084 (10.8% on the sum invested) plus you'd have enjoyed capital growth of 228%.

And that is with none of the dividends having been reinvested!

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