An Impressive Five Years
Shares in Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) have delivered an admirable performance over the last five years. While the FTSE 100 is up 70% over the period, Reckitt Benckiser has risen by 87% — partly as a result of its considerable exposure to emerging markets and the growth potential that exists in that space. However, now that it has almost doubled in five years, is Reckitt Benckiser still a great income play? Or is it no longer a super income stock?
Dividend Yield
Despite yielding just 2.8%, Reckitt Benckiser’s yield doesn’t paint the full picture. Certainly, 2.8% is better than a typical savings account and is ahead of inflation, but it’s behind the FTSE 100 average of 3.5%. However, Reckitt Benckiser pays out just 50% of annual profits as a dividend. This means that there is the scope to pay out significantly more as a dividend, but that management is choosing to favour reinvestment in the business to deliver future growth, rather than the present needs of shareholders.
That said, Reckitt Benckiser is forecast to increase dividends per share by 3.1% in each of the next two years. Although behind many of its sector and index peers, this growth rate is ahead of inflation and in-line with the market average. However, it is still not a particularly attractive prospect, given that the company’s yield is less than the market average.
Growth
As mentioned, Reckitt Benckiser is favouring long-term growth over providing a generous income to its shareholders. This could mean more lucrative long-term rewards for shareholders, as Reckitt Benckiser continues to tap into the above-average growth rates on offer from emerging markets. It could also mean that earnings increase at a brisk pace over the medium to long term so that a dividend payout ratio of 50% of profits equates to an impressive yield. Furthermore, should growth rates fade for Reckitt Benckiser, it could then begin to pay out a greater proportion of profits as a dividend. Until that day arrives, though, why not chase growth?
Looking Ahead
Indeed, Reckitt Benckiser appears to be focused on growth rather than income for its shareholders. With a growing exposure to emerging markets, this is arguably a sensible strategy and could benefit shareholders in the long run. For now, while it is a solid income stock, it is not a super income stock, but it certainly has the potential to become one over the long run.
