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As Reckitt Benckiser shares slip, I’m looking to buy

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Let’s get the bad news out of the way first. Reckitt Benckiser (LSE: RB), the FTSE 100 fast-moving consumer goods company, just lowered its revenue and profit outlook for 2019.

Naturally, the shares are weak today, but I’m cheering the falling share price because I’d like to buy the stock on better terms for the long haul.

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A focus on execution

The third-quarter results report reveals the Health division delivered a 0.3% decline in like-for-like revenue during Q3. Year to date, the decline in sales has clocked up 0.6%, and Health represents about 60% of total turnover. In the Hygiene Home division, responsible for the remaining 40%, like-for-like sales fared better, rising 4.5% in Q3, and 3.3% year to date.

Those figures don’t look too bad, but chief executive Laxman Narasimhan declared in the report that the performance was “disappointing.” He reckons the weakness in the Health business was because of “more cautious retailer seasonal purchasing patterns” in the US, and “challenging” market conditions in China for the firm’s infant nutrition offering.

But he also said the company’s performance reflects “an extended period of significant change and disruption” in the company. It seems the firm needs to pull its socks up and get the basics right because Narasimham is prioritising improvements in execution and operational performance while pausing everything else.

Despite these potentially short-term challenges, the business and the sector are attractive to me. Narasimham reckons the firm’s products address high-growth categories. And it’s hard to argue against the potential for the company’s “high-growth” and “market-leading” brands such as Dettol, Durex, Gaviscon, Harpic, Cillit Bang and Vanish.

Clear and addressable challenges

The issues are “clear and addressable,” according to the top executive. And that makes me optimistic we could be seeing short-term problems knocking the share price, which could throw up an opportunity to buy into the long-term story on better terms.

With the share price at 5,758p, the forward-looking earnings multiple for 2020 sits just over 16, and the anticipated dividend yield is around 3.1%. That’s not a bargain valuation but the business scores well against quality indicators.

For example, the operating margin runs just below 25% and the return on capital at about 11%. And over the past few years, revenue, earnings, cash inflow and the dividend have all been rising steadily.

Indeed, the fast-moving consumer goods sector is known for its defensive qualities, meaning that demand for the branded goods supplied by firms such as Reckitt Benckiser can remain resilient even during general economic downturns.  That’s why I believe this company would make a decent dividend-led investment with the aim of holding the shares for the long term.

And if the share price shows more weakness, the temptation for me to buy will become too great to ignore. Right now, I reckon the shares are more attractive than a cyclical, such as Whitbread, for example.

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Kevin Godbold has no position in any share 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.

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