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Reckitt Benckiser - dividend up, and strong Q4 boosts full years

George Salmon | 18 February 2019 | A A A
Reckitt Benckiser - dividend up, and strong Q4 boosts full years

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Reckitt Benckiser Group Plc Ord 10p

Sell: 5,820.00 | Buy: 5,823.00 | Change 44.00 (0.76%)
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A stronger fourth quarter saw underlying like-for-like sales (LFL) rise 3% across 2018, at the top end of previous expectations. Reckitt expects the improvement to continue into next year, and is forecasting LFL growth of 3-4%.

The shares rose 3.8% on the news.

The final dividend rose 3% to 100.2p, taking the full year payment to 170.7p (2017: 164.3p).

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Our View

The tried and tested double act of marketing and product innovation has helped sales, profits and dividends rise.

Admittedly, not all of the brands are flying (Scholl has been a serial underperformer in recent times) but when you run a stable of 18 powerbrands there's always going to be one or two bucking the wider trend.

This performance has helped the shares recover from 2018 lows. The current valuation is 16.8 times expected earnings - below its ten year average and some way below the 25+ times the shares were trading on in 2016.

To recover that kind of premium rating, Reckitt needs to improve performance of child nutrition specialist Mead Johnson, acquired in 2017 for $17.9bn.

The rationale behind the deal is sound enough. Around half of Mead Johnson's sales are generated in Asia, a region to which Reckitt was arguably underexposed, and these emerging economies should be capable of growth for years to come. We can expect $300m of annual cost synergies by 2020, while Reckitt's impressive cash generation should mean it can stomach the extra debts that came with the deal.

Unfortunately there have been some teething problems. Mead Johnson sales growth was in the years leading up to the acquisition, and many of its markets are unfamiliar to Reckitt. A difficult start to life with the baby brand might mean management aren't exactly sleeping easy.

With CEO Rakesh Kapoor retiring after eight years at the helm, Reckitt could be in for a bit for a shakeup. We wouldn't be entirely surprised if the increasingly distinct Health and Hygiene & Home divisions went their separate ways under the new boss.

Reckitt has an impressive track record and has been able to leverage established brands to build margins and cash flow. The dividend has grown 500% since 2003 as a result, although exceptional results such as these are not guaranteed and should not be seen as a guide to the future.

The shares currently offer a prospective dividend yield of 3% this year.

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Full year results

Net revenues rose 10% to £12.6bn, as currency weakness partially offset the boost from underlying growth and the Mead Johnson deal.

Adjusting for currency moves, full year operating profit rose 12% to £3.4bn, as reduced marketing investment helped underlying margins tick up to 26.7%.

Free cash flow was £2bn, down 4.7% as higher profits were offset by higher interest costs and increased capital expenditure. After outflows including the payment of dividends, net debt fell from £10.7bn to £10.4bn.

Health sales were £7.8bn, up 2% on an underlying LFL basis as Gaviscon, Nurofen and Strepsils all delivered solid growth. Sales in the infant and child nutrition business improved in Q4, although the Chinese market remains tough. Supply chain and manufacturing issues are being resolved, but will impact trading in the first half of 2019. Synergies are being delivered faster than originally planned.

Hygiene Home sales were £4.8bn, with LFL sales up 4% as a strong year in North America and developing Markets offset weakness in Europe, Australia and New Zealand.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.