Reckitt (LSE: RKT) shares have been an excellent long-term investment. Over the last 20 years, they’ve risen about six-fold and provided a steady stream of dividends along the way.
Are they worth buying today? Let’s discuss.
Long-term growth potential?
Let’s start with growth potential. Can the company – which operates in the areas of health, hygiene, and nutrition – grow its revenues and profits in the years ahead?
The answer to this question is yes, in my view.
Between now and 2028, the global consumer health market is projected to grow by around 7-8% per year. This market growth should provide healthy tailwinds for Reckitt, which owns some of the biggest brands in the industry (Dettol, Nurofen, Durex, Strepsils, etc).
Nutrition is another area that has plenty of potential. Reckitt owns one of the biggest brands in the infant formula space (Enfamil). And the market for these products is projected to grow by around 10% a year over the next decade.
One thing Reckitt has going for it on the growth front is brand power. This gives it the ability to raise its prices. This is handy in an inflationary environment.
Another thing it has going for it is the fact that consumers tend to purchase its products no matter what’s happening in the global economy. This is valuable in an environment of economic uncertainty, like we’re experiencing now.
In light of all this, I think the company is well-placed to generate solid growth in the years ahead.
It’s worth noting that currently, City analysts expect revenue of £14.96bn this year and £15.61bn next year, up from £14.45bn in 2022. Net profit is expected to climb to £2,451m in 2023 and £2,645m in 2024, up from £2,330m in 2022.
This top- and bottom-line growth is expected to support higher dividends. I’ll point out that Reckitt recently raised its annual payout by 5% to 183.3p per share (a yield of around 3%) and said it’s aiming to deliver sustainable dividend growth in future years.
Valuation
What about the valuation though? Do the shares offer value right now?
Well, at present, Reckitt is expected to generate earnings per share of £3.40 this year. This means at the current share price, the forward-looking price-to-earnings (P/E) ratio is about 18.
That is higher than the market average (the median P/E ratio across the FTSE is about 14). But I don’t think it’s an excessive valuation, given Reckitt’s track record of success.
Interestingly, analysts at Berenberg recently raised their target price for the shares to 7,575p. That’s nearly 25% above the current share price.
Risks
As for risks here, there are a few that are worth mentioning. Competition from new brands is one. These days, it’s easier for new brands to capture market share due to the power of social media.
Changing consumer preferences is another. There’s no guarantee that Reckitt’s brands will remain popular going forward.
A new CEO (Nicandro Durante) is also a risk. Durante previously worked in the tobacco industry and doesn’t appear to have much experience in health, hygiene, or nutrition.
My view
Overall though, I have a positive view on the shares at present. I think they’re worth buying today.
