FTSE 100 incumbent Reckitt (LSE: RKT) was once seen as a no-brainer defensive buy for many investors.
Things haven’t been great recently – more on that later – so is there an opportunity for me to buy cheaper shares with a view to a recovery toward former glories? Let’s take a closer look.
Tough times
As a reminder, Reckitt is one of the largest consumer goods businesses out there. With a raft of popular brands under its belt, including Dettol, Calgon, Air Wick, Durex, Nurofen, and more, it’s no wonder it’s been a popular stock in the past.
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Unfortunately, recent issues have prompted the shares to fall sharply. Over a 12-month period they’re down 22% from 5,826p, to current levels of 4,501p.
What’s happened?
Going back to 2017, the acquisition of baby formula business Mead Johnson Nutrition for over $16bn was the catalyst for Reckitt’s struggles, in my view. As well as arguably overpaying, Reckitt also inherited legal troubles linked to the firm’s products, which have been argued as being dangerous for babies. An Illinois court awarded a woman $60m for the death of her baby linked to the use of Mead Johnson’s Enfamil formula. The Reckitt share price fell by 15% alone when this happened.
Moving forward, there are still a few legal battles raging on. It seems the ill-fated acquisition has set Reckitt on an unwanted and costly course. I’ll be keeping a close eye on things.
The other side of the coin
Despite this rather large bump in the road, I still think Reckitt is a quality business. As mentioned earlier, its popular brands carry sway with consumers across the world. This is another bonus, as this vast presence could help boost earnings and returns.
Next, its decision – a bit like competitor Unilever – to streamline its brand portfolio and focus on its best-selling ones, could help the business recover from other issues. It’s a smart move, in my eyes.
Furthermore, Reckitt continues to look to expand into new territories to grow the business. This could be another money spinner that could help boost earnings and returns, as well as repair the damage mentioned earlier.
Finally, the shares are now trading at dirt-cheap levels, if you ask me. A price-to-earnings ratio of close to 13 is way below a five-year average of over 21. This is a great entry point that has tempted me today. Plus, a dividend yield of 4.4% is enticing. However, I do understand that dividends are never guaranteed. Also, this higher yield is the result of a share price drop.
What I’m doing now
It’s a tricky call for me to make, if I’m honest. I do believe there is a fantastic company in Reckitt. However, I’m not oblivious to the recent challenges, and what the poor decision of this acquisition has done to the business and its outlook.
Ultimately, ongoing lawsuits and the prospect of millions, or even more, in fines and litigation to come doesn’t sit well with me. I’m not planning on buying any shares right now but will keep a close eye on developments. I may revisit my position soon.
