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The Stock Picker’s Guide To Reckitt Benckiser Group Plc

Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.

In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety and valuation. How does Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) measure up?

1. Prospects

Consumer staples are a classic defensive sector.  When the FTSE 100 index halved during the financial crash, RB’s shares lost just 9%.

In recent years, RB has focused on growing its higher-margin health and hygiene brands like Durex and Neurofen, rather than lower-margin home-care products, though the distinction can be obscure. It recently moved into vitamins and health supplements with a £1.4bn US acquisition.

RB is a global business selling in 200 countries.  Rapid growth in emerging markets mean these now contribute nearly 40% of sales, and will receive an increasing proportion of RB’s capital spending over the next few years.

Its pharmaceuticals business still contributes a quarter of sales but is suffering from generic competition to its main product, suboxone.

2. Performance

RB has an impeccable record of rising sales, operating profit, earnings and dividends since at least 2005. Over that time operating margins have broadly strengthened, from around 20% to 25%. However, return on equity has followed the reverse trend due to acquisitions and capital investments.

Dividend cover has tracked down from 2.5 times to just under 2, but is still acceptable.

3. Management

A lifelong employee, Rakesh Kapoor succeeded as CEO in 2011 and has been responsible for RB’s healthcare and emerging markets focus.

The Benckiser family still own 10% and nominate one director.

4. Safety

Net gearing is a modest 40% and interest cover is massive. Funding is helped by getting better terms of trade from suppliers than customers receive, which means RB can run on negative working capital like supermarkets do.

Operations are highly cash generating, with surplus funds spent on acquisitions and share repurchases in recent years. There is a small pension surplus.

5. Valuation

RB’s historic price-to-earnings (P/E) ratio of 18, falling to 16 on forecast earnings, is at a discount to Unilever‘s 20 and 18 respectively. Much of the discount is due to the drag of RB’s pharmaceuticals business, and a disposal might eliminate it.

Though the sector has been buoyed by investors seeking safe yields, perhaps surprisingly RB’s P/E has often been higher, and its yield lower than the current 3%.

Conclusion

RB’s defensive qualities and safe dividend make it an attractive cornerstone share. It has been catching-up in emerging markets, though its pharmaceuticals business is a headache.

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> Tony owns shares in Reckitt Benckiser and Unilever. The Motley Fool has recommended shares in Unilever.