With Neil Woodford announcing earlier this week that he has sold out of Reckitt due to its rich price and now Hugh Yarrow at Evenlode Income reducing his position, I thought that I should take a quick look to see whether I can see what all the fuss is about.
Reckitt Benckiser, for anyone who doesn’t know, makes cleaning and personal health care products; silly but useful things such as, Cillit Bang, Nurofen, Strepsils, Dettol, Scholl, French’s, Durex, Vanish, Clearasil, Gaviscon, Lysol, Air Wick. It is an amusing list and the loss of any of these products to your life is unlikely to bring disaster, but they all have their uses and, being branded and relatively expensive, are highly profitable. RB also has a pharmaceutical arm, which is going to be de-merged later this year in an attempt to focus attention on its portfolio of brands.
Towards the end of July, RB reported a strong first half to the year where, at constant exchange rates, its revenues grew 3% on a similar rise in operating profit. They were a decent set of results and contributed to a return of +9% for RB this year to date, against a return for the FTSE 100 of -6%.
Excluding its pharmaceutical arm, RB is targeting revenue growth of 4-5% a year with flat to moderate operating margin expansion. It is not going to be an exciting ride, but you will also get a twice-covered dividend yield of 2.7% to keep you company.
As of close-of-play Friday, RB was selling for 5,130p, which is nearly 7% off its 52-week high (5,495). The trailing P/E ratio (using last year’s earnings) is 18.7. That starting earnings yield of 5.3%, for a boring company with a simple business and clear path to steady growth, especially with the 30-year gilt giving only 2.94%, is not unattractive to me.
What would Ben Graham’s rule-of-thumb formula say?
Just as a reminder, the formula is usually given as follows:
(See here for more information about this)
Where:
V = Intrinsic Value
EPS = Current Earnings
8.5 = Graham’s PE for a no-growth company
2g = Twice the expected annual growth rate.
4.4 = the average yield of high-grade corporate bonds in 1962, when the formula was designed.
Y = the current yield on AAA corporate bonds, which is 3.92%.
Taking a conservative annual earnings growth rate of 5% and current, normal earnings of 273.8, this formula gives a rough intrinsic value of 5685, suggesting RB is about 10% below its intrinsic value. The bond yield used is of course weirdly low, but it is a reminder that we live in weird times.
So, although I won’t be adding to my holding at these prices (no margin of safety), given the business model and long-term prospects (Gaviscon and Strepsils to China!), I certainly won’t be selling up either. Looking back at my records, the PE ratios of the shares when I bought them were between 13 and 17 which, with hindsight, seems to have been a reasonably good investment. So, I will try not to be stupid now and so will sit back with expectations of nothing more than a modest return from today’s price and a couple of dividends a year.
Disclosure: Long RB..
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.