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Why I’d buy this Nick Train favourite for 2020 and beyond

When it comes to makers of soapy things, I’ve always liked PZ Cussons (LSE: PZC). But the FTSE 250 company has been through a few tough years of falling earnings. And a five-year share slump has pushed the price down 38%. But with an earnings uptick forecast for 2021, should we be thinking of buying?

The price fall has pushed up dividend yields, and we’re looking at a forecast of 4.1% for the current year. That would rise to 4.5% by 2022, and with cover of around 1.45 times, which seems attractive. But a still-high P/E multiple of 16.5 on the cards for 2020 makes me a little nervous.

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The shares picked up a little in response to Tuesday’s first-half report, so the optimism might be returning. The company said: “Challenging market conditions across key geographies led to a decline in group revenue of 4.3%.”

There’s a 30.7% rise in operating profit from continuing operations, after exceptional items. Before exceptionals, we see an 11.9% fall at actual exchange rates. Pre-exceptional adjusted EPS dropped 6%, which is better than the 8% fall predicted by analysts. And after exceptionals, that converts to a gain of 55% to 7.1p.

It’s hard to pull too much from these figures at the moment, but it does look like Cussons is at the crux of its restructuring.

The firm has maintained its interim dividend at 2.67p per share, and that turns my attention to the balance sheet. I find net debt of £136.2m at 30 November, down 23% from the same date a year previous. That’s good progress, but it still stands at 2.25 times annualised operating profit. And I twitch a little at that.

But I think we’re looking at the start of a solid recovery here, and Nick Train has bought some. I’m optimistic.

Bigger cousin

In some ways, PZ Cussons is like a FTSE 250 equivalent of Unilever or Reckitt Benckiser (LSE: RB). I rate both of those as reliable long-term investments.

But despite traditionally being something of a safe haven investment, Reckitt Benckiser shares have had a shaky five years. They’re up just 6% over the period, and down 22% from 2017’s peak.

Does that mean the shares are undervalued now? EPS is expected to fall 3% this year and the same next, and that gives us forward P/E multiples of around 18.5-19.5. Not outrageously high for a safety stock, but not an obvious bargain either.

Expected dividend yields are reasonably high by Reckitt Benckiser’s recent standards, at around 2.8%. Cover looks more than adequate too, at a little over 1.9 times. But I think there’s better out there.

I rate Reckitt Benckiser as very much a defensive investment. And with a few uncertain economic years ahead of us after Brexit, I can see why investors might want to put their money into it. But I just don’t see the next decade doing much for Reckitt Benckiser shareholders.

If I wanted long-term income from defensive FTSE 100 stocks, I’d go for utilities like National Grid, offering 5% dividend yields. I see better growth potential there too, making for a more attractive share valuation.

And if you like the idea of growth through recovery, I’d seriously take a closer look at PZ Cussons.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of PZ Cussons. 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.