Consumer goods giant Reckitt Benckiser Group (LSE: RB) has been one of my favourite FTSE 100 dividend growth stocks for years, but recent performance hasn’t really justified my faith.
Today’s half-yearly results were disappointing with the stock falling more than 5% on flat like-for-like sales and revenue growth in the second quarter.
Honesty is best policy
We’re all used to chief executives bigging up underwhelming results by focusing on the positives and refusing to mention the negatives, so CEO Rakesh Kapoor’s candour is refreshing. “Our like-for-like performance in H1 was +1%, somewhat below our expectations. Hygiene Home delivered another quarter of consistent top line growth but progress in Health in Q2 was disappointing.”
Q2 net revenue was flat at £3.08bn, while its full-year net revenue target was revised downwards from 3%-4% to 2%-3%, which reflects the slow start to the year but improving trends for H2.
Kapoor added that: “Hygiene Home has been unleashed and is delivering consistently. But on our journey to be a world leader in consumer health, we have work to do to deliver consistent financial performance.” Then he moved on to the positives, which include plans to restore growth, including “an exciting innovation pipeline such as Mucinex Night Relief and Enfa Grass Fed”, and further investment in brand equity and medical marketing.
The Reckitt Benckiser share price now trades 10% lower than it did three years ago, against growth of more than 15% on the FTSE 100 as a whole over the same period. The index also yields 4.3%, while Reckitt Benckiser has a forecast yield of just 2.6%, covered exactly twice. So it’s been trailing both on growth and dividends.
On the other hand, management announced an interim dividend of 73p per share today, which is 4% ahead of last year. So there is moderate progression.
Its forward valuation is 18.8 times earnings. Like its FTSE 100 rival Unilever, it has a habit of trading at well above 20 times earnings, given its defensive characteristics and strong levels of demand among investors. So today’s Reckitt Benckiser valuation is relatively cheap by its standards, as recent disappointments have been priced in.
Interestingly, the FTSE 100 as a whole trades at a lofty 18.61 times. It’s usually a lot cheaper than Reckitt Benckiser.
The slowing Chinese market has hit the group’s Health division, which was also knocked by continuing declines in Scholl as the company tries to refocus the brand, while core brands Dettol and Durex also slowed in the second quarter in key developing markets, which I wouldn’t normally expect.
Margins continue to disappoint, with the £47bn group’s adjusted operating margin down 10 basis points to 23.6%.
Reckitt Benckiser is a company I still admire, and it offers attractive defensive prospects as the global economy starts to look a bit shaky. GA Chester reckons its hidden value could soon be outed, as he sees a strong case for separating the group’s two businesses, RB Health and RB Hygiene, into two independent companies with sharp entrepreneurial drive and focus, and plentiful shareholder rewards.
Nobody knows what the new boss will do. But today’s share price dip could be an opportunity to pick up a stake in its future.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2019