Consumer goods giant Reckitt (LSE: RKT) was a super-solid UK share for years. Investors loved it. Until suddenly they didn’t.
Previously called Reckitt Benckiser Group, the FTSE 100-listed stock is a British-Dutch multinational company with global clout. It markets and sells a host of hygiene, health and nutrition brands worldwide, including Air Wick, Calgon, Cillit Bang, Finish, Harpic, Nurofen and Vanish.
Reckitt was seen as the ultimate defensive stock, offering both share price growth and dividend income at every stage of the economic cycle. Then it tripped up.
Reckitt wrecked itself
The Reckitt share price has been in meltdown, crashing 27.45% over the last 12 months. Over two years, it’s down 35.39%.
It started August trading at a 52-week low of 4,098p. It’s crept up slightly to 4,251p but looks to be in bargain basement territory.
That stock trades at just 12.97 times earnings. That’s incredibly cheap by its standards. For years, it was routinely valued at around 25 times earnings. The yield’s climbed to 4.53%, which is more than double the income investors used to get. A major blue-chip that’s on its uppers, but with bags of recovery potential. What’s not to love? Rather a lot, sadly.
Reckitt’s troubles date back to its ill-fated 2017 takeover of US-listed baby milk formula maker Mead Johnson Nutrition for a hefty $16.6bn. As well as overpaying, it acquired a nasty legacy of legal claims, particularly over its Enfamil formula. In March, a court in Illinois awarded $60m in damages to a woman whose premature baby died in intensive care after consuming Enfamil. The verdict knocked 15% off Reckitt’s share price, or £5.4bn.
Bring out the Dettol
The shares continue to flounder, despite first-half results landed broadly in line with expectations on 24 July, with net revenue growth of 0.8%. Currency headwinds turn that into a 3.7% dip. CEO Kris Licht pledged to “further increase returns to shareholders through an increase in our dividend” and a £1bn share buyback programme. It didn’t help.
Reckitt also announced it was slimming down its portfolio to focus on core businesses by selling brands including Air Wick, Calgon and Cillit Bang. It’s also looking to offload its Mead Johnson Nutrition business. It made no difference.
Reckitt’s stock tumbled again on 29 July, after a US jury found that infant formula by US rival Abbott Laboratories had caused a girl to develop a dangerous bowel disease. Abbott was ordered to pay $95m compensatory damages with a massive $400m punitive damages on top. The ruling has almost certainly sunk the planned Mead Johnson disposal.
With Mead and Abbott facing up to 400 more legal claims cases, the outlook is massively uncertain. Throw in a tornado that hit US production and accounting issues in the Middle East, and this is a hard stock to love right now.
Others may disagree. At heart, this is still a brilliant company. It has a raft of superb household name brands. The shares have been suppressed by a rotten decision made by an earlier CEO seven years ago. They could snap back nicely if legal battles go in its favour, and I’ll kick myself. Yet it’s not a risk I want to take today. It’s far too binary. I’m still not touching it.
This post was originally published on Motley Fool
