For most shares in the FTSE100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects
- Risks
- Valuation
Today, I’m looking at health, hygiene and home consumer products company Reckitt Benckiser Group (LSE: RB) (NASDAQOTH: RBGLY.US).
Track record
With the shares at 4,693p, Reckitt Benckiser’s market cap. is £33,788 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 6,563 | 7,753 | 8,453 | 9,485 | 9,567 |
| Net cash from operations (£m) | 1,333 | 1,948 | 1,544 | 1,740 | 1,888 |
| Adjusted earnings per share | 160.9p | 198.9p | 229.4p | 249.9p | 267.6p |
| Dividend per share | 80p | 100p | 115p | 125p | 134p |
1. Prospects
In the Autumn, Reckitt Benckiser’s third-quarter results showed 6% total revenue growth and 4% growth on a like-for-like basis compared to the year-ago figures. That’s a workmanlike rather than a stunning performance on growth, and such steady expansion is why investors tend to prize defensive-style businesses like Reckitt Benckiser.
Indeed, most of Reckitt’s operating regions enjoyed some growth during the period. Last year around 56% of core net revenue came from Europe and North America, 27% from Latin America, Asia and the Asia Pacific, and 17% from Russia, the Middle East and Africa. So, it’s not surprising that the directors have a keen focus on emerging markets: they account for almost 50% of revenue already and there’s no doubt that the firm sees growth in up-and-coming areas as essential to progress in 2014 and beyond. We’ll see if momentum has continued with the full-year results due around 12 February.
The strength of the investment proposition here depends on the firm’s ‘power’ brands: hygiene products such as Dettol and Harpic, which provide around 44% core net revenue; health products like Durex, Strepsils and Gaviscon, which deliver around 25%; and home products, like Vanish, Cillit Bang and Calgon, which contribute about 23%.
The firm’s products enjoy brand loyalty from customers and have strong repeat-purchase credentials, which makes the company something of a stalwart on the London stock market. Growth may not always set you a quiver with excitement, but there’s a strong feeling that an investment will ‘get there in the end’ and deliver a worthwhile return for long-termers.
2. Risks
One of the chief investment risks is the potential cyclicality of the P/E rating. Investors tend to covert defensives like Reckitt Benckiser when the economic world is going to hell in a handcart, such as recently. That can drive the P/E rating up.
When economic headwinds start to recede, such as now, stodgy-looking old dependables like Reckitt Benckiser can fall out of favour as higher-growth propositions start looking attractive. That can lead to P/E compression, which could drag on the share-price despite the company’s operational progress.
3. Valuation
The forward dividend yield for 2015 is running at about 3.3%. City analysts expect forward earnings to cover that payout around 1.8 times.
Meanwhile, the shares are trading on a forward earnings multiple of about 16.5, with earnings’ growth expected to come in at about 6%.
What now?
Despite the firm’s strong-brand credentials, given the immediate growth on offer I think Reckitt Benckiser shares look expensive. Faster growth may materialise in the future, but I’d prefer a higher dividend yield while waiting. If trading conditions remain subdued for some time, P/E compression could affect the total-return potential for investors.
