Today’s first quarter update from Reckitt Benckiser (LSE: RB) shows that the consumer goods company has made a strong start to the year. It’s on-track to meet full-year targets and delivered upbeat performance in Europe and North America despite some weakness in the US from anticipated retailer destocking due to the relatively weaker flu season.
Developing markets also saw impressive performance, with China and India continuing to provide a strong growth platform for the company. However, Brazil remains a challenge for Reckitt Benckiser owing to a weak economy, while Africa is also seeing a tough macroeconomic outlook but still offers excellent long-term growth prospects.
With Reckitt Benckiser currently having a yield of 2.1%, many investors will feel that it lacks sufficient income prospects to warrant investment. While this may be the case at the present time, the company pays out just 51% of its profit as a dividend, so there’s scope for shareholder payouts to rise at a faster rate than profit over the medium term. And with Reckitt Benckiser having excellent growth potential across all of its geographies, profit growth is likely to be very encouraging.
Superb yields
Of course, two stocks that offer superb yields right now are Aviva (LSE: AV) and British American Tobacco (LSE: BATS). As such, they seem to be better income buys, with Aviva yielding 5.5% and British American Tobacco having a yield of 3.8%.
With Aviva being in the midst of integrating its Friends Life acquisition, the company is undergoing a somewhat uncertain period. This means that the market is perhaps discounting Aviva’s valuation to some degree, with the life insurer trading on a price-to-earnings (P/E) ratio of just 9.3. This appears to be unjustly low and could rise over the medium-to-long term – especially as Aviva begins to deliver on the synergies that were a major reason for the deal. And with Aviva having a payout ratio of just 51%, there’s plenty of scope for dividend rises ahead – even if profitability does disappoint somewhat.
Similarly, British American Tobacco has excellent long-term income potential. That’s because it has tremendous pricing potential that should help it offset the gradual decline in cigarette volumes that has been a feature of the industry in recent years. When this is coupled with the potential for growth within the e-cigarette space, British American Tobacco’s future seems to be very bright even though regulatory action across the developed world is likely to hurt cigarette volumes yet further.
While the firm pays out more of its profit as a dividend than Aviva or Reckitt Benckiser, this shouldn’t be a cause for concern. Although 71% of profit is paid out each year, British American Tobacco’s sales are consistent and robust, while it’s a very mature business in a mature industry and so can afford less reinvestment than many of its index peers.
