"Good news in my opinion, they have enough on their plate..."
I think the SP reaction tells us that this is the consensus opinion.
RB are trying to make a virtue of a necessity in pulling out - they were (relatively suddenly) on the back foot, given both balance sheet and tarnished reputation. They had no support for doing the deal, and their SP reflected this.
Hence the rather curious formal statement today which they didn't need to make, having said nothing formally about the potential deal before. But if they hadn't already blown the balance sheet on MJ last year, with the associated charge of over-paying still hanging over them, I don't for a minute think this Pfizer situation would have ended the same way!
SP at 5565. Down 11% on a month ago, down 20% on 2 months ago. Good value - screaming BUY I reckon. Most people would rather buy Cillit Bang or Flash than the supermarket own label. This gives RB and ULVR immense pricing power.
"Citigroup today reaffirms its buy investment rating on Reckitt Benckiser Group PLC (LON:RB.) and set its price target at 7200p."
SITH - I think £72 might well be the "new £90" when it comes to Reckitts targets... there are still plenty of fan-boys among sell-side RB analysts, but their cheerleading is increasingly hoarse IMHO...
You just have to look at the steady decline in consensus estimates - we are now below 340p consensus EPS for 2018 (and depending on FX, I suspect this might have to come down a bit further). I would have to check, but I am pretty sure this was up at 375-380p or even more, not that long ago.
Of course, £72 is perfectly plausible, and possibly in relatively short order (in the overall scheme of things) - and I'd repeat my view that £57 is indeed "too cheap", on most realistic scenarios... and time horizons. But certain things would need to happen - MJ needs to turn up more decisively (and not just via the old trick of suddenly finding more synergies to target)... and they probably have to dodge the bullet of the Pfizer Consumer auction, though I am not sure the CEO will see it that way.
Broker Forecast - Citigroup issues a broker note on Reckitt Benckiser Group PLC
By StockMarketWire | Wed, 28th February 2018 - 09:00
Citigroup today reaffirms its buy investment rating on Reckitt Benckiser Group PLC (LON:RB.) and set its price target at 7200p.
"I have a question for RB share holders... Do you feel the sentiment would change if RB announces something on the above two categories?... Assume the above is via a licensing deal so not much cash paid upfront (not in the billions!!!!) but via royalities?"
AI - a bit of a strange question... and intriguingly cryptic?
The answer for me would be - maybe a tad, at the margin, and wouldn't do any harm.
But de minimis, really... all else equal, it's not going to make much of a dent in the two (and related) big issues currently confronting the SP, namely (i) the accusation that they have significantly over-paid in the $17bn Mead Johnson deal, and (ii) they may be about to try and justify paying a not dissimilar amount for the Pfizer consumer unit, with associated concerns over a possible need for a big equity finance element.
I think the fall has been way overdone on this one...
I have a question for RB share holders.
Would you support a deal whereby you get to grow market share of the Durex Brand in North America by Durex offering a new type of condom "dubbed the Viagra condom"... (Tremendous scope over here given Trojan is number 1 by some margin in North America)
Would you support a deal whereby RB can get into the Erectile Dysfunction Market including over the counter (OTC switch at an appropriate time in the future but prescription only during the early stages)
The above two would fit into the strategy of focussing more on the higher margin sector of consumer health
The above would also drive "growth"
Do you feel the sentiment would change if RB announces something on the above two categories?
Assume the above is via a licensing deal so not much cash paid upfront (not in the billions!!!!) but via royalities?
Bill1703. You say " you receive cash as a dividend, and your shares are marked "ex-dividend" by an equal amount".
True in principle, but it's not possible to say exactly how much they are re-rated because dividends and gains are taxed differently and the price can change substantially regardless of the dividend: due to overall market sentiment. The re-rating should reflect some sort of average tax situation for the different holders.
What I'd like to know is how that average compares to my own tax situation, in case it is better for me, personally, to deal just before or just after the ex-div date. The difference could be negligible but I'm certainly not a typical (investment house fund manager?) shareholder.
In the most recent edition, with RB currently an underperformer within their "Great Ideas" portfolio. Full text below:
"OUR BULLISH CALL on consumer health and hygiene titan Reckitt Benckiser (RB.) is a disappointing 16% in the red. The shares have fallen despite full year results (19 Feb) revealing a return to sales growth in the fourth quarter, boosted by a strong start to the flu season, as well as a 7% hike in the total dividend to 164.3p.
Investors were disappointed as the Durex, Strepsils and Air Wick brands owner missed 2017 profit estimates and issued vague guidance for moderate medium-term operating margin expansion. In 2018, the £42.7bn cap is targeting 13% to 14% total sales growth thanks to the acquisition of US baby formula maker Mead Johnson, yet tepid 2% to 3% like-for-like growth looks on the cards amid tough market conditions.
Uncertainty regarding the magnitude and financing of mergers & acquisitions is also weighing on the shares; Reckitt could become involved in an auction for Pfizers consumer healthcare operations, which are up for sale.
Though market conditions are challenging, we remain fans of Reckitts brand strength and consistent dividend growth and note Liberum Capitals £80 price target, one implying a healthy 35.4% upside.
SHARES SAYS: Reckitt Benckisers 2017 performance and share price chart are disappointments to us, yet were sticking with the company for its focus on higher margin health and hygiene categories and growth potential in emerging markets."
Fairly heavy-hitting stuff from the FT today. Pretty much all of it "fair comment" IMHO - but as always, it is op-ed pieces like this that actually pique my interest, as they often prove to be a reverse indicator of 'going bearish at the bottom'.
Anyway, full text below for anyone who is interested:
"Reckitt Benckiser faces battle to regain markets trust"
"Rakesh Kapoor may have hoped he had put 2017 behind him, but the chief executive of Reckitt Benckiser looks to have his work cut out again this year. Despite his trademark evangelicalism, whether in describing a new campaign for Durex condoms involving emojis or the thermo-foaming properties of the groups latest Finish dishwasher tablets, Mr Kapoors persuasive abilities failed to prevent Reckitts shares falling 7.5 per cent on Monday their biggest one-day fall in more than seven years.
Investors were disappointed that the groups usual forecast for moderate margin expansion would be watered down in 2018 by Mead Johnson, the US-based infant formula business bought last June for $17bn. Margins would also be hit by costs related to last autumns decision to split Reckitt Benckiser into two business units. The group also said unfavourable currency movements would reduce its 2018 results by 7 per cent higher than analysts expectations of a 3 per cent hit.
At heart, however, is an issue of trust. As recently as 2015, Reckitt enjoyed like-for-like revenue growth of 6 per cent. And, as Mr Kapoor reminded analysts on Monday, since 2012 it increased its operating profit margin by 5 percentage points to 27.1 per cent last year, the highest among home and personal care companies. But for the past 18 months, Reckitt has suffered a series of one-off problems and disappointments that have led some investors to question Mr Kapoors sure-footedness. A failed Scholl footwear launch and Junes cyber attack, which affected dozens of companies, had a bigger than expected effect on revenues.
Reckitt entered 2017 with a forecast for 3 per cent like-for-like revenue growth, but for the first nine months of the year, like-for-like revenues fell 1 per cent compared to the same period in 2016. There was some recovery in the final quarter, with growth of 2 per cent. That took revenues for the year to £11.5bn flat on the previous year. Mr Kapoor says Reckitts markets are now growing at just 2 per cent because of pressures on consumer goods companies from a price war between retailers grappling with the growth of ecommerce groups such as Amazon. Reckitt is forecasting 2-3 per cent revenue growth in 2018, which should imply some outperformance if it manages to hit the top end of that range.
But James Edwardes Jones, an analyst at RBC Capital Markets, says: We are concerned at the lack of value growth, which in our view has been a crucial element of RBs historic success. We wonder to what extent this plays a part in managements expectation of some specific factors impacting margin for 2018. The acquisition of Mead Johnson has also drawn a mixed reception. While Mr Kapoor regards the infant formula business as within the consumer health sector that he sees as Reckitts aspiration, others are less sure. Over-the-counter drugs are seen as having high earnings quality but Meads infant formula sales are highly dependent on the potentially attractive but unpredictable Chinese market.
Mr Kapoor declined to comment on Monday on the sale of Pfizers healthcare arm, valued at between $14bn-$17bn, but has previously said he would be very interested if the US pharma group were to put the unit up for sale. However, concerns exist about how Reckitt would pay for the business given that its net debt levels are high following the Mead Johnson acquisition, at 3.5 times ebitda. Iain Simpson, analyst at Société Générale, says: There is a strong strategic rationale for RB acquiring Pfizer Consumer Health but there is a price at which this potential acqui
"... what a shareholder ""should"" care about is the total return on his investment, not the payout in dividends.... The buyback exercise effectively bribes the shareholder with his own money ... which gives the impression ... that you are gaining more from the deal... The exercise of changing the payout ratio is to some extent doing the same thing... unless you have really grown the earnings (cash measurable) to match the % growth in the dividend, you are basically increasing the risk on the payout."
I am certainly with you there, Games, and while I know I'll never persuade you on the merits of share buy-backs (when conditions are appropriate, of course), I am happy to agree on payout ratios. Yes, allowing policy creep here can boost (hard cash) dividends, which of course is an important (arguably, THE most important) part of the total return equation - but the higher the payout ratio, the less sustainable the dividend (or at least, any future growth therein) and hence the greater chance that what you gain on the divi you will, over time, lose on the SP part of the total return.
Comparing (as I like to do) RB with immediate consumer-giant peers ULVR and DGE, it is interesting that RB continues with its more "prudent" policy of pegging payout to around 50% of underlying EPS (ie. dividend cover c.2x), whereas both ULVR and DGE have felt the need to run cover down (now respectively 1.6x and 1.7x most recent FY).... like the actual dividend quantum itself, the payout ratio is always a choice, not an economic obligation - and choices can be changed.
As always, the best way is to look at true dividend "capacity" is to ignore the whims of policy and consider free cash flow, out of which sustainable dividends ultimately must paid. At £60, RB is now on a FCF yield of 5.0% FY17 (vs 4.5% previous) - relatively attractive against ULVR (4.6% FY17, up from 4.2%) and DGE (4.1% FY17, up from 3.3%).
Even as we (understandably) dip below £60, it is this FCF profile which should provide considerable support to RB, and should ultimately drive the longer term recovery - even with the margin pressure alerted for the current year and the exceptional costs associated with business restructuring, there is a good chance that the overall quantum of FCF will edge up again this year, and continue to grow thereafter.
Near term, it'll still be a case of "all bets off" if they end up buying the Pfizer business... but then, if they don't pay too much for it, it's unlikely to be the worst deal in the world (quite a big "if" admittedly, and the market will doubtless shoot first and ask questions later). And of course, it may still never happen....
"I rather feel that you missed the point of my post."
Indeed -- the buyback exercise effectively bloats the appearance that your dividend is increasing, when in fact what a shareholder ""should"" care about is the total return on his investment, not the payout in dividends.
The buyback exercise effectively bribes the shareholder with his own money (part of the asset) which gives the impression (again illusion) that you are gaining more from the deal.
The exercise of changing the payout ratio is to some extent doing the same thing -- you raise the dividend, but progressively, unless you have really grown the earnings (cash measurable) to match the % growth in the dividend, you are basically increasing the risk on the payout.
It's a fools gold unless the company realistically increases the revenue and the income at the same rate, hence reducing the need to keep increasing the payout ratio.
It's this latter aspect that's been driving the share prices of all these companies, together with the cheap borrowed money over the last 10+years.
At the end of the day it's simple mathematics, somewhat disguised in the parlance of the annual reporting shenanigans.
Games -- I guess it's enough on the topic -- we should agree to disagree I suppose.
Given that I currently rely on dividends for a large part of my current income, I really don't know how I'm going to break this to my bank manager...
As a shareholder, you don't own a fixed proportion (or percentage) of the capital of a business - 'cos the business can change this without you having any say in it (often, without you even knowing it). Yes, there are some checks and balances - eg. rights issues, where you have to be at least offered the chance to buy an appropriate portion of new equity - but the capital base can still change significantly over time without requiring rights issues.
However, you do own a fixed number of shares, and there is nothing a company can do to change arbitrarily the overall value of these - all else equal, naturally. Yes, they can change the nominal value of these shares (eg. a share consolidation or split), but the total value of your holding would remain the same (again, all else equal).
So it follows... the total dividend paid to you on this fixed number of shares is what matters to you, and any other shareholder - first and last. The actual quantum of dividend paid out by a business is not your concern, and has no direct impact on the value of your holding or your total returns from the same...
You can see this clearly in stocks paying (either now or previously) a large part of their "dividends" as scrip divis (Shell being a classic case study). So what matters? The total amount paid out in dividends by the business... or the dividend per share payable on your holding? If it was the former, you'd be forgiven for thinking that the dividend was being cut significantly in some years... but it ain't, so you aren't!
"Guys, surely it is the amount paid out in divis that counts, not the divi per share."
Counts to whom, Lupo? For the individual shareholder, the only thing that matters is the quantum of his/her dividend, as part of their total return... and for that calculation, it is divi per share that is relevant, not the overall amount paid out by a company.
With the latter, the equity base can often change a lot over time, either increasing (through rights and/or other share issues, big or small) or decreasing (through share buy-backs etc)... but movements in a corporate equity base are relatively incidental to an individual shareholder, unless and until they buy more shares (or sell part of their holding).
Lest we forget, there is no intrinsic "value" in dividends paid out as opposed to the equivalent capital being retained in the business, all else equal... you receive cash as a dividend, and your shares are marked "ex-dividend" by an equal amount. So, what matters for the calculation of the ex-dividend impact? Dividend per share, NOT the total amount paid out by a business....
Guys, surely it is the amount paid out in divis that counts, not the divi per share.
Lupo, the conciliator and not invested in RB. I have considered investing here in past years, but something always held me back - apart from the rating. Now it's fallen back, I don't want it (reasons amply stated today). Such is life
"Yet revenues should increase 13-14% and margins should rise . If this happens earnings should increase substantially . Also the splitting h into two business units to me suggest. Hygiene will be sold off or de- merged at some point as they push further into health where margins and pricing power is stronger ."
VMB - most of this revenue increase is from full year consolidation of MJN, and it looks like margins will go down, not up this year - as per the effective "warning" today, albeit quantification is lacking (see earlier broker comment, forecasting a 50bps margin decline vs the consensus forecast of -10bps).
I agree on Hygiene - and possibly sooner than later? Selling it may be the only way they can make the possible Pfizer Consumer deal work, given the current balance sheet...
"I suspect all the doom mongers will he proved wrong again after a couple of updates . Strategically MJ makes great sense - getting them great exposure to China ."
I suspect you are right - but also as you imply, it could take at least a couple of updates for visibility and confidence to improve. In the meantime, the concern that they will pay too much for the Pfizer business, plus the associated funding issues, will weigh on sentiment... I argued earlier that the latter could see the SP below £60, it now looks like we might well get there very much sooner than later.
I know a number of commentators have questioned the strategic rationale for MJN (see also earlier broker comment), though I am more agnostic. But I also know that the charge of overpaying for a big deal can weigh heavily on a stock for a long time indeed, irrespective of the strategic justification - and RB are now open to that charge. FWIW the strategic rationale for buying the Pfizer unit looks stronger to me - if they could have their time again, I wonder if they'd now steer clear of MJN and spend "their" money on the latter instead?
Anyway... hindsight is a wonderful thing. It's probably a Buy now - as long as one is relatively relaxed about not necessarily buying at the bottom...
Ive held these for seven years and done v well . The share s re weak due to missing forecasts and low-key lfl sales going forward. Yet revenues should increase 13-14% and margins should rise . If this happens earnings should increase substantially . Also the splitting h into two business units to me suggest. Hygiene will be sold off or de- merged at some point as they push further into health where margins and pricing power is stronger . I suspect all the doom mongers will he proved wrong again after a couple of updates . Strategically MJ makes great sense - getting them great exposure to China . Rem ember its still the most profitable consumer business in the world ( margin wise) so they know what theyre doing . I think the corner has been turned.
"Not harsh at all in my view, since if you are reducing the number of shares in issue, it is indeed an illusion that the dividend is increasing by a certain % as stated at the time of issue in the company announcement - when in fact if you do the mathematics back to the pre-diluted number of shares in issue, the increase is even smaller or non existent... So illusion it certainly is."
Nope, an illusion it certainly is not... if the company says it is increasing the dividend PER SHARE by 7%, then your dividend "cheque" (or current day equivalent) will be up 7%. Reality, not illusion... real hard cash you can spend or reinvest, whatever you prefer.
It would only be illusion in either of two alternative cases:
First, if the company increases shares in issue (eg. in a rights issue), and then subsequently says the total dividend is up x%, whereas the value of your dividend as an individual shareholder would be up by less than x%, if indeed it is up at all (and assuming an unchanged holding). But companies (for that very good reason) tend to declare dividends on a per share basis, not total quantum.
And second, if the company changes the number of shares you hold (eg. with a consolidation) and then declares a dividend per share increase, without adjusting for the consolidation... in which case the increase in the value of your dividend will NOT be in line with the company declaration. That would be an "illusion"... and I am aware of a couple of such cases, though they are rare in practice, particularly so these days.
""Albeit a trifle harsh to say "illusion" of dividend growth""
Not harsh at all in my view, since if you are reducing the number of shares in issue, it is indeed an illusion that the dividend is increasing by a certain % as stated at the time of issue in the company announcement - when in fact if you do the mathematics back to the pre-diluted number of shares in issue, the increase is even smaller or non existent.
"... but for all the potential ... adjustments... the numbers are all falling, so something is wrong somewhere.... and I think it's more telling is that in a period (the last stand out 10 years) of printed money ... each and everyone of them, except Kimberley, has relied on savaging the payout ratio to maintain the illusion of dividend growth."
Yes, Games, I will grant you, the consistency of the broad picture probably has at least some statistical significance and demands further scrutiny... and I would say you are probably onto something with your payout ratio point. Albeit a trifle harsh to say "illusion" of dividend growth - any individual shareholder would say the "actuality" - but it does beg questions about the sustainability thereof, etc.
"That tells you a lot I think, it tells you that when that music stops, the P/E ratio's of all these companies are on the way down."
Only, their P/E ratios have been on the way up for a while now (eg. the past couple of years), to well above historical mean levels - albeit they are coming down now, for at least some (RB, ULVR). But I guess you would say the music hasn't stopped yet...
"... these companies have employed modern day managers, who's trick is to make sure they get well paid... they have all bought back the stock in their companies to assist their EPS linked remuneration packages."
You old cynic, you! I would say, it was probably a more valid accusation in the 'bad old days', and possibly even 10 years ago - but these days, we're seeing more and more cases where multi-level composite packages are linked to various indicators and metrics (not just financial) as opposed to EPS, which is increasingly only a minor component of many. Though again, this may still be less true of the US, which tends to lag in such areas, and it is also in the US where buy-backs have been most heavily employed... which (I am sure you would say) may not be a coincidence!
And.... we do have to ask, what are we paying for, and what behaviour are we actually encouraging (wittingly or not)? Take the RB CEO, fabulously well rewarded by anyone's standards (aside from perhaps Sir Martin's....) - yet he has just presided over a £13bn deal where it looks like he spent at least a couple of £bn too much, and now might well be about to launch into another deal of broadly similar size. If he gets it right, he will doubtless be even more richly rewarded... if he gets it wrong, he'll be pensioned off (and that's one gold-plated pension) with the pleasure of getting to spend more time with his money (or our money, as you may prefer to see it)...
Assymetric risk and reward... nice work if you can get it! And so... what chance he will suddenly show financial discipline now when he's been already showered with cash for failing to do so before? Forget buy-backs and packages linked to EPS... how do we get our business leaders to treat our money like it's their own??
"""Also and I think it's more telling is that in a period (the last stand out 10 years) of printed money and asset boosts by QE, and artificially low interest rates -- each and everyone of them, except Kimberley, has relied on savaging the payout ratio to maintain the illusion of dividend growth.""
And something else I missed -- as most, and again I haven't analysed it, of these companies have employed modern day managers, who's trick is to make sure they get well paid, very well payed, they have all bought back the stock in their companies to assist their EPS linked remuneration packages.
In doing so, you'd assume that the payout ratio would ease because there are fewer stocks in issue to spread the spoils over -- so it makes the rapid and big increases in payout ratio's look even more dangerous.
"However - not saying your conclusion is necessarily wrong!"
Bill, that's why I called it fag packet -- but for all the potential hidden purchases and sales and adjustments and tax changes and the alterations to the balance sheets and what have you -- the numbers are all falling, so something is wrong somewhere.
Also and I think it's more telling is that in a period (the last stand out 10 years) of printed money and asset boosts by QE, and artificially low interest rates -- each and everyone of them, except Kimberley, has relied on savaging the payout ratio to maintain the illusion of dividend growth.
That tells you a lot I think, it tells you that when that music stops, the P/E ratio's of all these companies are on the way down.
I have no clue at the moment in what to do about holding 3.27% of my wad in Unilever or my just under 1% in RB -- but at least they appear (if not supported by an in depth analysis) to have risen over 10 years -- the other three are questionable at best.
"If you were a betting man/woman, and history was all you had to go on, maybe you'd avoid Nestle, PG, Kimberley and buy some more Unilever and RB?... Or maybe view it from a contrarian perspective and decide this old approach has had it's day and invest in something else... Back of fag packet analysis provided here free of charge!"
Games - I'd say there's not nearly enough analysis here. You are merely reporting bald numbers from a third-party source, yet no sense of just how much distortion there will be in some (or all) of these numbers - and I am sure there will be a lot - both on the revenues line and in the net profit figures, from big acquisitions (or disposals), big one-off and/or exceptional items within net profit figures, etc.
Just look at RB's FY figures today... a big increase in sales (and there'll be another one this year), but no sign of any value being delivered from it (thus far, anyway). And there are some huge one-offs in reported net profits (from a major disposal and exceptional tax changes, etc) - this would give a very distorted picture if incorporated into such a survey, yet I'm not sure the obvious anomalies would be captured in your analysis of historic headline reported data?
However - not saying your conclusion is necessarily wrong! Problem is - yes, history is indeed all we have to go on, really... but it's a terrible guide to the future! With SPs (and hence prospective investment returns) as it is with most other things....
I haven't had a good enough look at any of Nestle, PG, Kimberley in recent times to comment... beyond that, an interesting question as to which of ULVR and RB you would buy today. RB probably now the cheaper stock... only issue, there're good reasons to suspect it might get cheaper still. If, of course, you want to buy either of 'em...
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.