Companies that supply everyday consumable items — like toiletries, cleaning products and foodstuffs — are the kind that do well in recessions — they’re good resilient “defensive” stocks.
I wouldn’t, however, expect them to be leading the way once economies and markets start to recover (and that’s why I’m not surprised, for example, to see Unilever lagging the FTSE this year).
Imagine my surprise, then, when I took a new look at Reckitt Benckiser (LSE: RB) (NASDAQOTH:RBGLY.US), and saw that a recent spurt has taken the share price up 26% since the start of January to 4,892p, blowing away the FTSE’s relatively meagre 13.2%.
Reckitt Benckiser is a bit behind the FTSE on dividends, with its forecast 2.9% yield coming in slightly behind the index’s 3.2%, but that doesn’t really change anything.
Pricey shares?
With a share price growth like that, coming on top of a few years in which defensive stocks should do relatively well, you might expect the shares to be on a fairly high price to earnings valuation. And you’d be right — full-year forecasts put the shares on a forward P/E of 18.5, which is significantly above the FTSE’s long-term average of around 14.
Is such a valuation justified? I’m not so sure about that.
Steady profits
Reckitt Benckiser reported a 6% rise in first-half revenue to £4,994m at constant exchange rates, with like-for-like revenue up similarly and adjusted operating profit up 2% to £1,163m. Adjusted diluted earnings per share came in 7% ahead at 118.3p, leading to a 7% hike in the interim dividend to 60p per share.
Three months later things looked pretty much the same, with revenue for the first nine months of the year up 6% to £7,542, though like-for-like revenue growth only managed 5%. There were no profit figures with the Q3 update.
The firm is pretty hot on acquisitions, with chief executive Rakesh Kapoor telling us that although markets are still tough, “Our recent acquisitions are performing strongly, ahead of in-going assumptions and consequently, we now believe that our full year net revenue growth (ex RBP) including the net impact of M&A will be at least 6%“.
Which is best?
Compared to Unilever forecasts, Reckitt Benckiser shares perhaps look better value — there’s an 18% fall in EPS forecast for Unilever, putting its shares on an even higher P/E of 18.7, though there is a better 3.6% dividend yield expected.
On the whole, Reckitt Benckiser (along with Unilever) is a well-managed company providing a pretty safe investment and decent, if not exciting, dividend returns. But for me, at these valuation levels there are better alternatives.
Still, whether I’m right or wrong, Reckitt Benckiser does seem to be on for a winning 2013.
