Is Reckitt Benckiser Group Plc A Better Buy Than Aviva plc And British American Tobacco plc Following Today’s Results?

Should you ditch Aviva plc (LON: AV) And British American Tobacco plc (LON: BATS) in favour of Reckitt Benckiser Group Plc (LON: RB)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Aviva and British American Tobacco. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »