With FTSE 100 fast-moving consumer goods enterprise Reckitt Benkiser (LSE: RKT), a high dividend yield’s arisen because of a troubled underlying business.
Even rebranding its trading name to just Reckitt and changing its stock ticker hasn’t stopped the decline in the share price, as the chart shows!
The company ran into problems starting in 2017 after making the huge acquisition of Mead Johnson Nutrition – a US-based manufacturer of baby milk formula.
The move was several steps away from the firm’s previously established strategy of making smaller, bolt-on acquisitions. As I see it, the lesson for all investors here is not to put too many eggs in just one basket. Diversification can be key when building both businesses and stock portfolios.
A stable dividend stream
Nevertheless, despite the well-reported challenges experienced by Reckitt’s business over the past few years, it’s managed to keep up the shareholder dividend payments.
The directors held the payment flat in 2020 and 2021, during the pandemic. But it rose in 2018, 2019, 2022 and 2023. I think that’s quite an achievement and speaks volumes about the underlying strength of the business.
The fast-moving consumergoods sector has always been a good hunting ground for dividend investors. Names like Unilever, British American Tobacco, Britvic and Diageo often feature in dividend-focused portfolios.
It’s the defensive nature of operations that’s so attractive. Companies operating in the sector tend to be more resilient to the ups and downs of the general economy than cyclical outfits. That often leads to stable incoming cash flow, which is good for paying consistent dividends.
Strong brands often back up the offerings of these defensive businesses. In the case of Reckitt, best-sellers include Cillit Bang, Durex, Nurofen, Vanish and others.
But such businesses tend to be prized by investors and their valuations can be high. However, Reckitt’s troubles have made the stock look cheap compared to others in the sector. So if the worst is behind the business as hoped, it could be worth doing further research now with a view to buying some of the shares.
Earnings growth ahead
City analysts predict advances in earnings per share around 7% both this year and next. The dividend looks set to chip up by a few percent each year too. Meanwhile, the company issued a positive outlook statement in April saying the business is on course to meet its full-year targets.
Of course, all businesses and stocks come with risks as well as positive potential. Reckitt’s already demonstrated its capacity for making strategic missteps and could do so again at some point. Meanwhile, a cheap-looking valuation rarely saves shareholders from losing money when a business hits trouble.
Nevertheless, with the share price near 4,442p, the forward-looking dividend yield for 2025 is around 4.7%. And I see that level of income as attractive from a recovery and growth story like Reckitt.
