3 Great Reasons Why Reckitt Benckiser plc Is Set To Take Off

Today I am looking at why I believe Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) is an excellent stock selection for savvy investors.

Stellar brands keep revenues rolling

Reckitt Benckiser is home to a multitude of self-proclaimed ‘Powerbrands’ across the household goods space, from detergents and cleaning products such as Finish and Vanish through to pain reliever Nurofen and Strepsils throat lozenges. The popularity of these brands helped push net revenues 7% higher in January-June, to £4.99bn, and adjusted operating profit 3% higher to £1.16bn.

The strength, and consequent pricing clout, of these labels is helping the business to steadily improve margins, and first-half gross margins leapt 230 basis points to 58.7%. These brands are also helping to drive operations in emerging markets, and although break-neck activity in these regions has slowed owing to wider economic considerations, Reckitt Benckiser’s excellent margin story should keep earnings rolling even if consumer spending is squeezed.

Questions rumble over Suboxone rivals

A long-running point of concern for investors has been the loss of Reckitt Benckiser’s patent in the US for its Suboxone tablets and film, which are used to combat drug addiction. This opens the door to rivals treading on the company’s territory, and Orexo is planning to launch its Zubsolv product in mid-September.

Although the introduction of the drug on long-term revenues remains an unknown at this stage, the brand strength and long-standing reputation of Reckitt Benckiser’s product will make it difficult for its competitors to make initial inroads into its market share. And with prescriptions between the drugs not interchangeable, and Reckitt Benckiser maintaining coupon rebates and conducting regular visits to doctors in the States, its rivals may have a tough time claiming revenues from Suboxone.

An excellent all-round for reliable returns

Not many stocks have been able to maintain steady earnings and dividend growth in recent years, but Reckitt Benckiser has chiselled out a way to keep both ticking higher.

The household goods giant has seen earnings per share (EPS) rise over each of the past five years, riding out the effect of wider macroeconomic weakness on consumers’ wallets throughout the period. And following last year’s 7% EPS rise, analysts are expecting a fractional improvement this year to 267.6p before a more marked 3% increase in 2014 to 276.7p.

As well, Reckitt Benckiser has relentlessly lifted the full-year dividend, and 2012’s payment was up more than 67% from that of five years previously, at 134p per share. And City brokers expect this to continue rolling higher, with dividends of 139.3p per share and 146.6p per share forecast for 2013 and 2014 respectively.

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Although Reckitt Benckiser fails to carry spectacular dividend yields for these years — readouts of 3.2% and 3.3% are in line with the average forward reading of 3.2% for the complete FTSE 100 — I reckon that a backdrop of improving earnings should underpin increasingly-appetising dividends further out.

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> Royston does not own shares in Reckitt Benckiser.