The Motley Fool

Forget the Cash ISA! I think this FTSE 100 dividend stock could double your money

The best flexible Cash ISA on the market today offers an interest rate of just 1.36%. By comparison, the Reckitt Benckiser (LSE: RB) share price supports a dividend yield of 2.9% at the time of writing.

On top of this income, I think the stock also has the potential to double from current levels.

Under pressure

Shares in consumer goods group Reckitt have come under pressure over the past three years as management has struggled with rising costs and stagnating sales.

The maker of Mucinex flu medicine and Dettol cleaning products has faced a perfect storm of disasters during this period. These including buying a business that had sold deadly humidifier systems in South Korea, and a $1.4bn settlement related to alleged mis-selling of an opioid addiction treatment. That’s not to mention the impact of a significant cyber attack on the group and disruption at a baby milk factory.

These events have weighed on growth since 2017. Between 2014 and 2017, the company’s earnings grew at an average annualised rate of more than 10%. However last year, growth ground to a halt and this year, City analysts are forecasting a decline in earnings per share of around 3.5%.

According to Reckitt’s new CEO Laxman Narasimhan, who recently replaced Rakesh Kapoor, the company’s big problem is execution. He wants to change that. The CEO is planning to unveil a turnaround plan when the group reports its full-year results in February.

Reckitt does have huge potential, but it needs to get its house in order before shareholders can reap the benefits. Sales have increased at a compound annual rate of 6.5% since 2013, and City analysts expect this trend to continue for the next few years.

On top of this, the company’s operating profit margin has remained relatively stable at around 24%. However, higher taxes, interest costs and exceptional charges have chipped away at the bottom line.

The bottom line

If Reckitt’s new management can stop the rot, and return the group to growth, then I think this could be an excellent investment.

Historically, the shares have changed hands for as much as 25 times forward earnings. Today they’re dealing at just 17.7 times. If confidence returns, based on current City growth projections, a multiple of 25 times projected earnings suggests a possible share price of £84, approximately 42% above current levels.

That’s excluding any further earnings growth. If management can get Reckitt back to the position it was in three years ago, when earnings were growing at a double-digit rate every year, the stock could be worth as much as £135 in five years, according to my calculations. That’s a return of nearly 130% on the current share price.

These are only back-of-the-envelope calculations and depend entirely upon management’s ability to engineer a return to growth successfully. Nevertheless, I think they clearly illustrate Reckitt’s potential and show why this stock could be a much better investment than a Cash ISA over the long term.

There’s a ‘double agent’ hiding in the FTSE…

We recommend you buy it!

You can now read our new stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

Rupert Hargreaves owns no 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.