With a yield of 4.5% and a P/E ratio of 14.2, could this FTSE 100 member be a hidden gem?

With its above-average yield and low P/E ratio, there’s lots to like about this FTSE 100 stock. But our writer’s concerned about a recent legal case.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Person holding magnifying glass over important document, reading the small print

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Reckitt Benckiser‘s (LSE:RKT) one of those FTSE 100 stocks that rarely attracts much attention. With an impressive portfolio of famous hygiene, health and nutrition brands — Durex, Dove and Dettol, to name just three — it’s the sort of company that quietly goes about its business. 

Good value

For the year ending 31 December (FY24), analysts are expecting earnings per share (EPS) of 320.1p. With a current (20 September) share price of 4,541p, this gives a price-to-earnings (P/E) ratio of 14.2.

Looking further ahead, this drops to 13.3 (FY25) and 12.3 (FY26). This appears attractive given that the average for the past five years has been just under 20. Therefore, now could be a good time to buy.

Income investors will also appreciate the amount of cash that’s being returned to shareholders. Although not guaranteed, it looks as though the company’s going to pay a dividend of 202p a share in FY24. This suggests a yield of 4.5%, comfortably above the FTSE 100 average of 3.8%.

And it appears to offer good value compared to, for example, Unilever which also operates in the fast-moving consumer goods (FMCG) sector. In 2024, analysts are forecasting EPS of €2.76 (£2.32). If these estimates prove to be accurate, based on a current share price of £48.46, the stock offers a much less appealing P/E ratio of 20.9.

Unilever’s yield’s also inferior to that of its smaller rival. Using the dividends for the four quarters to 30 June, its shares are currently offering a return of 3%.

Reasons to be cautious

But there are a couple of issues that cause me concern. In March, a court in the United States ruled that Reckitt Benckiser’s infant formula (Enfamil) caused gastrointestinal problems for a baby that subsequently died. Although the damages of $60m (£45m) are a drop in the ocean for a company worth £31bn, I fear others may bring similar actions.

Indeed, another case is due to be heard on 30 September.

The company strongly refutes the new claim and has decided not to make a provision in its accounts at 30 June. Accounting standards require money to be set aside if it’s “probable that an outflow of cash or other economic resources will be required“.

On the day of the judgement, the share price fell nearly 15%.

It was a similar story in February. The company’s stock fell 13% after accounting irregularities were reported in the Middle East. A small number of employees were said to be under-reporting liabilities. Correcting the issue resulted in a £35m hit to its bottom line.

Is it time to invest?

Although on paper I think the shares offer excellent value at the moment, I believe this has more to do with the uncertainty over its infant milk than anything else.

The company’s stock’s currently changing hands for 21% less than at their 2024 peak. And there’s been a steady decline since the company lost its Enfamil court case.

Until this issue’s resolved, the shares are too risky for my liking.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser Group Plc and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

30,000 shares in this FTSE 250 REIT could earn me £559 a month in passive income

Real estate investment trusts can be great passive income investments. And Stephen Wright likes one from the FTSE 250 with…

Read more »

Investing Articles

Down 24% and yielding 9.18! Is L&G the best passive income stock on the FTSE?

Harvey Jones is the first to admit that the Legal & General share price has had a poor year. But…

Read more »

Investing Articles

Warren Buffett just bought these 2 stocks!

Warren Buffett just invested $700m in these stocks! What’s the strategy behind them, and should investors think about following in…

Read more »

Investing Articles

£10 a day invested in UK stocks could create a second income of £40,000 a year!

Investing even a small amount of money regularly can generate a substantial second income stream in the long run. Zaven…

Read more »

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

Are these the best stocks to buy and hold in a SIPP?

The UK has 30 ‘Dividend Aristocrats’ to buy and earn rising passive income in a SIPP, but are they the…

Read more »

Investing Articles

These UK shares are close to record cheap levels

These two UK shares are trading below their average earnings multiples, creating a potentially explosive buying opportunity for patient investors…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

My Stocks and Shares ISA has exploded in 2024. Here’s what I’m doing now

Zaven Boyrazian’s Stocks and Shares ISA is beating the FTSE 100 and S&P 500 in 2024. Here’s a look at…

Read more »

Investing Articles

Here’s the dividend forecast for Lloyds shares out to 2026

Predictions for dividend progress from Lloyds shares over the next few years look upbeat now. But the path might not…

Read more »