Reckitt Benckiser (LSE: RB) is a company I’ve long admired. Indeed, I’ve been a shareholder in the past.
Ordinarily, I’d consider RB a hold at around its current valuation, but right now I think there’s a case for selling and buying fellow FTSE 100 consumer goods champion Unilever (LSE: ULVR) instead.
Relative valuation is one reason, but there’s also another factor lurking in the background, which many investors may be unaware of.
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Relative valuation
The table below shows price-to-earnings (P/E) ratios and dividend yields for the two companies, based on consensus analyst forecasts for 2015 and 2016.
| Recent share price | 2015 P/E | 2016 P/E | 2015 yield | 2016 yield | |
| RB | 6,017p | 25.0x | 23.3x | 2.0% | 2.2% |
| Unilever | 2,805p | 21.3x | 20.1x | 3.1% | 3.3% |
Both companies trade on P/Es at a premium to the FTSE 100’s long-term mid-teens average, which is only to be expected for such reliable brand powerhouses.
For the decade following the 1999 merger of Reckitt & Colman and Benckiser, RB outgunned Unilever on earnings growth and shareholder returns, aided by some shrewd acquisitions and a highly profitable speciality pharmaceuticals business.
However, there were changes as we entered the current decade. In 2009, Unilever appointed Paul Polman as its new chief executive — the first outsider in the company’s long history — who has shaken up what was a rather bureaucratic and set-in-its-ways business. Meanwhile, RB chief executive Bart Becht, who had driven the company’s stunning success through the Noughties, retired in 2011. Growth at RB’s speciality pharmaceuticals business slowed as its main product lost exclusivity, and the division was demerged as Indivior at the end of 2014.
As a result of these events, I think growth at RB and Unilever will be more similar in the future than in the past. Indeed, we’ve seen it in recent years, and both companies are forecast to deliver the same mid-to-high-single-digits annual earnings advances for 2015, 2016 and 2017.
In light of this, the significant discount of Unilever’s P/E to that of RB shown in the table above — and a dividend yield a full percentage-point higher — suggest to me that Unilever is a markedly more attractive proposition than its rival at current prices.
The other factor
Bart Becht left RB to head US beauty company Coty. Within months Joh. A. Benckiser (JAB) — the investment company of the founding family — reduced its stake in RB from 15% to around 10.5%. A few weeks ago, JAB’s representative on RB’s board of directors — deputy chairman Peter Harf — stepped down, and, three days ago, JAB further reduced its holding in RB to below 10%.
While Harf has said JAB intends to keep “the large majority” of its stake in RB as a long-term strategic investment, it has been clear for some time that JAB — where Mr Becht also sits on the steering committee — appears to believe it can make a better return by deploying capital elsewhere; including in Coty, which Mr Becht is aiming to build into a global beauty leader to rival L’Oréal and Estée Lauder. JAB has a controlling stake in Coty, which has recently struck a multi-billion-dollar deal to acquire 10 fragrance brand licences — including Gucci, Hugo Boss, and Lacoste — from Procter & Gamble.
In short, then, the descendents of the founding Benckiser family appear to be happy to see JAB capital flowing out of their heritage company and into other investment opportunities. For me, Unilever looks an attractive alternative to RB right now.
