Reckitt Benckiser (RBGPF.US)(RB.L) is Britain’s answer to Procter & Gamble (PG). Of course there are other investment options which offer exposure to brand investing including Nestle (NSRGY) and Unilever (UL) amongst others. However Reckitt has had far superior past earnings growth than the rest of the sector constituents.
Reckitt is capitalized at $36.08 billion (conversion rate from £ to $ at 1.55) whereas Procter is nearly five times larger at $177.86 billion.
A past earnings summary and forecasts are as follows (derived from www.digitallook.com):
It’s interesting to note that both companies are trading at or below their historic multiple and at or above their historic dividend yield. Reckitt seems cheaper in this regard than Procter. Similarly Reckitt seems cheaper than Procter on a P/E basis however American companies always trade at slightly higher multiples than British companies. Note that Reckitt Benckiser’s year end is December 31 whilst Procter & Gamble’s year end falls on June 30. Therefore if we were to use a 12 month rolling month multiple both companies would be using roughly the same multiple taking the U.S./UK multiple difference into account.
Procter & Gamble is a constituent of the Dividend Aristocrat list whilst Reckitt Benckiser is a member of the S&P Euro 350 Dividend Aristocrat list. Future dividends aren’t guaranteed because of these inclusions however it shows that both companies are strong cash producers and can therefore return cash to shareholders under almost all conditions. These companies, provided all other criteria pass the test, could be great constituents in a portfolio that focuses on dividend growth.
Both companies are finding growth in their home markets challenging and currently most, and expected future, profit growth comes from the emerging markets.
For the first quarter of 2011 (July to September), Procter’s sales grew by 9% with organic sales increasing by 4%. The difference was mainly due to forex movement. All six business segments were up year on year. Diluted EPS grew by 1% to $1.03. Operating cash flow equaled $2.2 billion in the quarter with free cash flow coming in at $1.3 billion. There were $1.3 billion shares repurchased over the quarter and $1.5bn handed back to shareholders via dividends.
Looking forward Procter sees net and organic sales up by 3-6% for the year ending June 30, 2012. The forex impact is expected to be neutral on these figures. Pricing is expected to add 3-4% to sales whilst unfavourable product and geographical mix is expected to reduce sales by 1-2%. Diluted EPS is forecast to come in at between $4.17 and $4.33 up 6 – 10% year on year.
The third quarter results 2011 for Reckitt Benckiser shows sales up 16% (+15% at constant exchange rates) which is ahead of forecasts. Diluted EPS increased by 9% to 63.9p. Like for like growth increased by 4%.
Reckitt forecasts a 12% increase in sales and a 10% rise in net income for the year dependent upon a normal flu season. These results, if achieved, will show above average industry growth in very challenging market conditions.
The major difference between RB. And PG is the fact that RB. Has a pharmaceutical division which contributes 8% to group turnover. The main product of the RB. Pharmaceutical division is Suboxone which is basically a type of opioid medication to help wean drug addicts of opiates. Initially Suboxone was issued in tablet form however with looming patent expiry Reckitt designed a film substitute which currently is selling well.
There has been speculation around The City (i.e., London’s equivalent of Wall Street) that both Unilever (ULV.L) and Johnson & Johnson (JNJ) intended making a bid for Reckitt at around £40 per share. Currently, apparently due to market conditions, those plans are now on hold.
Both companies utilize brand led sales strategies whilst trading on a similar multiple. Reckitt’s dividend yield is slightly higher and cover is forecast as 1.9 times compared to 2.05 for Procter.
A table of further ratio is as follows:
Net Profit Margin
Return on Equity (2)
1) Taken from third-quarter trading statement. All other RB. Figures derived from second quarter figures.
2) Calculated as Operating Profit/Equity
The annualized return on equity (41.5% based on full-year figures) for Reckitt Benckiser is materially higher than that of Procter & Gamble. In conjunction we must look at the net gearing as well as gross gearing ratios to check debt levels. In this case we can see that debt is broadly similar and that Reckitt is holding proportionally more cash.
Also the current ratio and quick ratio for Reckitt Benckiser is much lower than that of Procter & Gamble. To put these figures into perspective it is worthwhile to check out the working capital cycle for each company. Reckitt Benckiser has a working capital cycle of 130 days whilst Procter & Gamble’s working capital cycle takes 95 days (both figures calculated from the latest annual report).
Another key comparison is the return on retained earnings. For this calculation Reckitt Benckiser returns 28.01% against Procter & Gamble’s 8.81%.
In conclusion I would prefer to purchase Reckitt Benckiser shares over those of Procter & Gamble. With both return on equity and return on retained earnings being materially higher than those of PG whilst the multiple and dividend statistics are fairly equal Reckitt looks much more attractive as a longer term hold. In addition Reckitt Benckiser has a much smaller market capitalisation than Procter & Gamble which could lead to higher future growth as well as being an acquisition target.
A graphical representation of share price performance since the PG share split in 2004:
Disclosure: Long Reckitt Benckiser but not looking to add in the next 72 hours.