The star fund manager, Terry Smith has sold his entire holding of Reckitt Benckiser (LSE: RB). This sale, which occurred last month, ends Smith’s long-term backing of the company.
Smith set up his investment house, Fundsmith, in 2010 and has held a stake in Reckitts for over a decade. The company was part of the original Fundsmith Equity portfolio, a £23bn concentrated fund of 30 global stocks.
The high profile manager has not mentioned the reasons behind his sale of RB. Smith’s exit is timely as the shares have been falling. Investors are concerned that the strong demand for hygiene and health products, which lifted sales during the pandemic is unlikely to continue.
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Should I sell too? Let’s take a closer look.
Portfolio of brands
Reckitts has a strong brand portfolio including Dettol and Lysol, which have performed well during the pandemic. No one could have predicted the chaos of Covid-19 but it has worked in the company’s favour.
Recent results saw Reckitts upgrade its sales forecast. The consumer group now expects revenue to grow by “low double digits” rather than the previous “high single digit“. Board members clearly expect the high demand to continue, but I am unsure.
Long-term trend
The excitement of a Covid-19 vaccine has pushed down the share price. The company has been a clear winner of the pandemic, and management thinks that the current crisis will translate into a long-term behaviour shift.
While I appreciate that Covid-19 has been a catalyst for Reckitts, I am not convinced that this level of demand for its health and hygiene products can be sustained in the long term.
Strategic review
In September 2019, Laxman Narasimhan took over from Rakesh Kapoor as CEO of Reckitt Benckiser. Narasimhan immediately conducted a strategic review of the business and announced that he believed the company can grow its revenue by a “mid single digit” in the medium term.
As part of this strategic review, Reckitts expects to deliver a three-phase rejuvenation programme, which started earlier this year. The company will invest £2bn over three years to improve growth.
The arrival of a new CEO means a fresh strategy, especially when Reckitts has delivered poor results in recent years. While it is still early days to assess the performance Narasimhan’s plan, I believe the company is being ambitious with its targets.
Ongoing problems
Reckitt Benckiser has had its fair share of problems. Recent years has seen it deliver disappointing results. In February the company took a £5bn hit on its 2017 acquisition of baby formula maker, Mead Johnson.
In addition, Reckitts has battled a scandal over deadly humidifier disinfectant in South Korea, a cyber attack, and a $1.4bn settlement with the US regulator over its former subsidiary’s marketing of an addiction drug.
My verdict
The chairman, Christopher Sinclair, may be buying Reckitt Benckiser shares on the dip. But if I held the shares, I’d likely follow the example of Train, and sell. The company has an attractive dividend yield of approximately 2.5% but I want to see some evidence of the rejuvenation programme working in a post Covid-19 world before buying.
