During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Others scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business quality and value indicators.
In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting health, hygiene and home consumer products behemoth Reckitt Benckiser Group (LSE: RB) (NASDAQOTH: RBGLY.US), which scored 19 out of 25 in May.
Steady revenue growth
The third quarter results released in October showed 6% total revenue growth and 4% growth on a like-for-like basis compared to a year ago. Indeed, most of Reckitt’s operating regions enjoyed at least some growth.
Last year, around 56% of core net revenue came from Europe and North America, 27% from Latin America, Asia and the Asia Pacific, and 17% from Russia, the Middle East and Africa. The firm has a keen focus on emerging markets, which it sees as the way forward for growth.
With adjusted earnings covering last year’s dividend twice, borrowings around the level of operating profit, and a record of revenue, earnings and cash-flow growth, Reckitt scored well on my “business quality” indicators in May. Today, I’m happy to keep those scores at four, four and five out of five respectively.
Valuation
Since May, the share price has risen by around 3.4%. I thought the forward P/E rating overstated earnings and yield expectations back then and it still does now, being even higher at around 18. City forecasters are expecting just 2% growth in earnings during 2014 and the forward dividend yield is about 3%. On balance, I’m keeping my P/E score at two out of five.
The one area that has changed for me is the outlook. To my reading, the directors were a little less upbeat in the third quarter statement than they were at last year end, referring to on-going challenging market conditions. Very recent trading has been satisfactory, but I’m dropping my “outlook” score from four to three out of five.
So, my overall score for Reckitt Benckiser Group has dropped one point to 18 out of 25.
What now?
Despite the firm’s strong-brand credentials, given the immediate growth on offer I think Reckitt Benckiser shares look expensive. Faster growth may come along, but I’d prefer a higher dividend yield while waiting. If trading conditions remain difficult for some time, P/E compression could affect the total-return potential for investors.
