I’m out shopping for shares again. Should I add Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) to my trolley?
Household goodie
When I looked at multinational household goods giant Reckitt Benckiser back in February, I couldn’t quite whip up the enthusiasm to buy. I admired its roll call of avowedly unglamorous brands, such as Air Wick, Clearasil, Calgon, Dettol, Harpic, Nurofen, Strepsils and Vanish, and applauded its strategy of targeting emerging market consumers. But I thought it looked a little pricey at 17 times earnings. Should I buy it today?
I’m glad I held back in February. The share price has struggled lately, falling 7% in the last six months, against a 3.6% rise in the FTSE 100. Reckitt Benckiser still trades at a premium to the index, at 16.3 times earnings against 15.07, but the gap is closing. Investors have traditionally been happy to pay a little extra for this solid company, as they do with household goods rival Unilever, so this might be as good as it gets.
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Pain and gain
But why the recent share price drop? Demand for the group’s health and hygiene products in those key emerging markets continues to grow, according to its recent half-year results, but its pharmaceuticals business faces increased generic competition. Price restrictions in Europe are also hurting. Headline operating profits did drop 15% to £914m, but that was largely due to an exceptional £249m charge over past breaches of competition law. Adjusted operating profit grew 3% to £1.16bn.
Management admits it is facing “challenging market conditions”, but retains faith in its brand power, and is driving sales growth in just about every emerging market you can imagine. It has also successfully integrated recent acquisitions, including Durex (huge in China). The company has weathered the recession reasonably well thanks to its many defensive products. Neurofen helps relieve economic headaches.
Would Woodford buy it?
In a stock like this, the dividend is key. Management hiked the half-year dividend 7% to 60p, but it still yields just 3.1%, against 3.53% for the FTSE 100. I’m also disappointed by the steady slide in earnings per share (EPS) growth, down from 27% in 2008 to a projected 0% this year. EPS is forecast to grow by a modest 3% next year, taking the yield to 3.4%, but these figures do dampen my enthusiasm. Reckitt Benckiser remains a solid long-term buy and hold. A further share price dip would make it unmissable.
