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I'm always on the hunt for stocks with undervalued dividends and strong global brand power. One that has caught my attention lately is Reckitt Benckiser (LSE:RKT). This FTSE 250 consumer goods giant, with a portfolio spanning trusted household names such as Dettol, nurofenand air wickappears to be trading at a good discount despite its defensive qualities and promising growth prospects.
Valuation
Jumping straight to valuation, Reckitt Benckiser shares are currently changing hands at a staggering 42% below fair value, based on a discounted cash flow (DCF) calculation. Despite solid growth in the past, it could well be that the market is seriously underestimating the company's earnings potential and its ability to capitalize over the long term.
The company's main strength lies in its incredibly diverse brand portfolio spanning health, hygiene, nutrition and home care products sold around the world. This diversification provides resilience against the cyclicality of the industry and protects against over-reliance on a single product category.
Strong growth
Unlike many other companies in a traditionally defensive sector, Reckitt has achieved solid earnings growth of 22% annually over last year, well above the sector average of just 7.8%. The difference is likely driven by the company's innovation process, its increased marketing spending, and its global operating footprint.
For income investors, the business also represents a growing stream of dividends arising from its cash-generating business model. The company currently offers a mouth-watering dividend yield of 4.39%, well above the FTSE 250 average of around 3%. With a reasonable payout ratio of 84%, the dividend appears sustainable and supported by ample free cash flows.
Analyst enthusiasm
For a company that many would consider “boring,” the analyst community is overwhelmingly optimistic about the future, with the consensus price target implying a potential upside of 27.4% from current levels over the next 12 months.
Macquarie analyst Amit Sinha recently reiterated his 'Outperform' rating, citing strong pricing power amid inflationary headwinds, where many competitors have struggled:
“Despite cost pressures, we are encouraged by RKT's ability to accept prices that have held up much better than most of its core peers.”
Amit Sinha, Macquarie
Risks
Obviously, no stock is without risk and investors should consider a few key factors. Reckitt has a relatively high debt load after several large acquisitions recently, with a debt-to-equity ratio of around 97%. With interest rates still very high and the economy still in an uncertain situation as elections and geopolitical tensions dominate the headlines, there are some concerns if debt levels rise.
The company has also recently faced pressures on profitability due to inflation, supply chain disruptions and increased investments in brands. I suspect the worst of this is over, with inflation back in line with targets, but history has shown us that this can change quickly if not managed well.
However, Reckitt's ability to pass along pricing to consumers helps mitigate some of these obstacles. In addition, the company's global scale and brand value give it considerable competitive advantages over smaller rivals, which may rely more on demand in a single country.
In general
Given the brand's well-known cachet, impressive growth prospects, generous dividend yield and the stock's discounted valuation multiple, I find this to be a fairly compelling FTSE 250 company. Of course, there are risks, but when a company seems to be doing all the right things, I'll buy shares at the next opportunity.
