Earlier this month I voiced a bearish opinion on the prospects for Unilever in 2014. Not because it’s a poor company — on the contrary, I think it’s one of the greats — but because I think the flight to safety that has made it attractive to investors during the recession has pushed the share price up a little too high.
I think pretty much the same of Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US), which is in largely the same markets as Unilever, and for the same reasons.
Here’s a look at the past five years of headline fundamentals, with forecasts for three more years:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | 160.9p | +27% | 16.0 | 80p | — | 3.1% | 2.0x |
| 2009 | 198.9p | +24% | 16.9 | 100p | +25% | 3.0% | 2.0x |
| 2010 | 229.4p | +15% | 15.4 | 115p | +15% | 3.3% | 2.0x |
| 2011 | 249.9p | +9% | 12.7 | 125p | +8.7% | 3.9% | 2.0x |
| 2012 | 267.6p | +7% | 14.5 | 134p | +7.2% | 3.5% | 2.0x |
| 2013* | 265.0p | -1% | 18.2 | 139p | +3.7% | 3.0% | 1.9x |
| 2014* | 267.5p | +1% | 18.0 | 145p | +4.3% | 3.1% | 1.8x |
| 2015* | 283.3p | +6% | 17.0 | 155p | +6.9% | 3.3% | 1.8x |
* forecast
Nice fundamentals
Now, that’s undoubtedly an impressive record, but those earnings and dividend rises of just a few years ago are clearly slowing. And dividend cover is falling, though it’s still strong enough and compares favourably to Unilever. So why don’t I like the shares right now?
Well, low interest rates have made high-dividend shares attractive, especially to institutional investors seeking regular income, and the more reliable ones like Reckitt Benckiser are especially valuable.
That, of course, has driven the share price up. With a 75% rise over five years, it’s nicely ahead of the FTSE, and we’ve seen strong outperformance over the past 12 months with an 18% gain compared to less than 10% for the FTSE 100.
Upwards price pressure
The current political pressure on the energy companies has surely helped too, as their dividends are high and are considered amongst the safest in the business — or at least they were, until those threats to cap energy prices came along. I don’t think there will be any real long-term problems for the utilities, but uncertainty is probably the thing most big investors fear the most, and investors have been selling — and that money has gone somewhere.
And look at that price-to-earnings (P/E) ratio. With dividends around the FTSE average of about 3.1%, something around 14-15 seems fair to me, especially with three years of very little earnings growth on the cards.
But pushing it up to 18 or so? I reckon a combination of factors has made the shares a bit too expensive now.
Long term
Reckitt Benckiser sells its products widely around the developing world, and that really is where consumer companies need to be in the longer term — and that’s likely to set the firm up for many decades of strong business.
But for 2014, the shares look a little expensive to me and I can’t see 2013’s growth being repeated. And just as the Unilever share price has fallen back a little since last summer, I fear something similar could happen to Reckitt Benckiser.
Verdict: Set to stagnate in 2014!
