Reckitt Benckiser prospects clouded by delayed sale of two businesses

The overhang of the delayed sales of two key businesses due to the current market turmoil grabbed investors’ attention, as opposed to any underlying progress which Reckitt Benckiser Group (LSE:RKT) continues to display.

The separation of the Mead Johnson Nutrition and Essential Homes units are likely to provide a mountain to climb, and the current global economic uncertainty given the tariff traumas will likely impact on the timing of any sales. In the meantime, the two units account for around 30% of overall revenues, and this significant proportion muddies the waters for the prospects of what should eventually be a more focused and streamlined business.

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As such, the group is now reporting its “Core Reckitt” business in separate lines, where overall growth is generally being maintained. The group’s “Powerbrands”, which include the likes of Dettol, Harpic, Durex and Nurofen are household names with individual pricing power, making them relatively high margin products which have largely been able to fend off the threat of consumers trading down to supermarket own-brands.

This pricing power can both boost growth numbers and mitigate weaker trends as evidenced by the current trading situation. By geography, the Emerging Markets unit accounts for 40% of core Reckitt revenues and saw like-for-like growth of 10.7% in the period, largely due to strong performances in China and India, and comprising 6.8% volume and 3.9% pricing growth.

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By category, core Reckitt now comprises Self-Care (which accounts for 32% of revenues), Germ Protection (31%), Household Care (22%) and Intimate Wellness (15%). In Self-Care, revenue fell by 3.6% given volumes which dropped by 7.2%, although pricing mitigation of 3.6% lessened the impact. Germ Protection fared rather better, with sales growth of 7.5% made up of 6.8% on volumes and 0.7% in price.

The group has also maintained its guidance for the year as a whole, aiming for like-for-like revenue growth of between 2% and 4% in core Reckitt, while containing costs and protecting margins as being important factors within its control. In the meantime, its cash-generative ability leads to a healthy dividend yield of 4.1%, while in terms of overall shareholder returns, the previously announced £1 billion share buyback programme is ongoing.

While stocks such as Reckitt will never be seen as racy or high fashion, they are nonetheless rather more solid and dependable. These defensive characteristics can come into their own in market environments such as these, and indeed the group is cautiously confident that it can mitigate the effects of the tariffs as currently announced by pulling certain levers at its disposal.

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That being said, with the timing of any sales of Mead Johnson and the Essential Home businesses currently uncertain given these market conditions, the more immediate prospects for the group are clouded and are likely to remain so until a resolution can be found.

Prior to the unsympathetic reaction to this update, the shares had gained 16% over the last year, as compared to a hike of 3.5% for the wider FTSE 100, although over the past two years the challenges are more evident with a 24% decline. As such, the market consensus of the shares has recently weakened to a hold, albeit a strong one, although the shares are still seen by many as being a core portfolio constituent.