Reckitt Benckiser‘s (LSE: RKT) had a tough few years, leaving many income investors underwhelmed by the company’s performance. Down 8.2% in the past five years, the losses have eaten away at the dividend-driven second income it usually delivers.
But a strong recovery has already started and, if that continues, the next few years could be highly lucrative for shareholders.
When considering stocks in this type of situation, it’s critical to assess why they suffered and if the problem was a one-off issue.
Weighing up risks vs growth
The main reason behind Reckitt’s losses was the catastrophic acquisition of Mead Johnson, mainly due to a legal case around its infant formula Enfamil after a baby died. The company allegedly failed to warn that cow’s milk-based formulas carry elevated necrotizing enterocolitis (NEC) risk in premature infants.
It suffered a major recall in 2024, leading to chronic operational inconsistency such as weak sales, supply chain disruptions and input cost inflation that pricing couldn’t offset.
Despite a trial win in favour of Reckitt, the company’s still contemplating various options for the business, including a potential sale, signalling the litigation risk is existential.
For 2026 investors, this is a material risk that could wipe out years of margin gains and dividend growth.
The case for recovery
Reckitt’s genuinely improving its profits through a combination of cost-cutting and real business growth. In the first half of 2025, its profit margins expanded by 1.1%, and the company cut fixed costs by 1.9% compared to a year earlier. More importantly, its core brands (health, hygiene, nutrition) grew 4.2% in the first half and accelerated to 6.7% by Q3 2025, with strong momentum in emerging markets like China (+15.5%).
Earnings per share grew 4.4% in the first half, and management expects this to continue into 2026. The dividend is forecast at 4.2% yield with sustainable growth.
At £60 a share, 396 of them would payout around $1,000 a year in dividends, costing £23,760. That’s no small amount to put into one stock, so I’d need to be fairly sure about its future prospects.
If Reckitt can exit Mead Johnson by mid-2026 with litigation capped below $1.5bn, the turnaround story survives and Core Reckitt could deliver 5%-8% returns. But if Mead Johnson remains attached or settlement costs exceed $2bn, the entire recovery narrative breaks down and the stock could fall sharply. The litigation risk’s now the dominant variable, not margin expansion.
The bottom line
Unfortunately, this is an ‘execution and litigation lottery’, not a clean turnaround play — which is why valuations remain elevated despite genuine operational progress.
I’ve remained bullish on Reckitt’s recovery over the past year, but taking in all factors, it remains too risky for me to invest more now. For investors looking for a safer — albeit lower yield — option, I think Unilever‘s a better option to consider. The stock’s also suffered losses under a high-inflation environment, with consumers opting for lower-cost alternatives.
But with interest rates set to drop in 2026, it could see a notable recovery. In the long term, I think the stock’s better-positioned to deliver reliable income.
