MENU

Why FTSE 100 dividend stock Reckitt Benckiser could give you a comfortable retirement

Image source: Getty Images

The share price of consumer goods and healthcare giant Reckitt Benckiser Group (LSE: RB) rose by more than 7% when markets opened on Friday. The stock was in demand after the company upgraded its sales guidance for the year ahead and reported a 20% increase in half-year profits.

Shares in this £45bn-FTSE 100 firm rarely look cheap. But, as I’ll explain, I think they could make an excellent choice for a retirement investment portfolio.

Turning the corner

Reckitt’s brands include Dettol, Durex, Nurofen and Gaviscon. It operates in more than 60 countries and has a history stretching back to 1819. So it’s easy to see how the firm’s products are part of the fabric of life for many millions of people.

Despite this, the firm has faced some challenges over the last year, including a costly cyber-attack and problems with its Scholl foot care business. These now appear to be in the past.

Today’s half-year figures looked very good to me. Like-for-like sales were 4% higher at constant exchange rates, compared to the same period last year. Total sales rose 23% to £6,138m, thanks to the contribution from last year’s acquisition of infant formula business Mead Johnson.

This strong result was reflected in the group’s profits. Operating profit rose by 29% to £1,286m, excluding the impact of exchange rates. This gave an operating margin of 23.6%, broadly unchanged from the same period last year.

Why I’d buy

Reckitt’s high margins help the group to generate high levels of free cash flow. When this is combined with  stable, long-term sales of its core products, the result is a business which can deliver solid earnings and dividend growth over many years.

The shares look fully priced on a forecast P/E of 20.5. But the group’s dividend is consistently covered by free cash flow and the payout has doubled since 2008. So today’s forecast yield of 2.7% could be a very good starting point for a reliable, growing income. I’d be happy to buy the shares for a long-term, buy-and-hold portfolio.

Are you looking for capital gains?

Reckitt shares have tripled since 2006. But they’re not as cheap as they once were and future gains may be slower.

One company where investors are hoping for a significant share price rise is Premier Foods (LSE: PFD), which owns brands such as Mr Kipling, Batchelors and Bisto. This firm has struggled under a massive debt load that’s seen its shares fall from more than £20 in 2007 to just 42p today.

However, the group’s net debt is gradually falling. And trading appears to be improving. During the first half of this year, sales rose by 4.5%, helped by a 10% increase in sales of non-branded products made for supermarkets and other customers.

Investors are feeling more confident that chief executive Gavin Darby can deliver on forecasts for modest earnings growth and debt reduction of £25m per year. With the shares trading on just 5 times forecast earnings, there’s scope for re-rating here as debt levels fall.

It’s worth remembering that in April 2016, Premier rejected a proposed takeover offer at 65p per share — 55% above the current share price of 42p. The shares may be worth considering as a speculative turnaround.

Buy-And-Hold Investing

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it right away!

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.