Is Reckitt Benckiser The Ultimate Retirement Share?

Published in Company Comment on 19 September 2012

Will shares in Reckitt Benckiser help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Reckitt Benckiser (LSE: RB), the consumer goods giant that owns brands such as Durex, Calgon, Finish, Nurofen and Cillit Bang.

Cleaning up

Reckitt Benckiser has performed strongly against the FTSE 100 over the last 10 years, as these figures show. Its defensive bias -- people don't stop cleaning their kitchens or getting headaches during recessions -- has helped it deliver consistently good performance:

Total Return20072008200920102011Trailing 10 yr avg.
Reckitt Benckiser27.0%-11.5%33.7%8.2%-6.4%13.1%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%8.1%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Reckitt's trailing 10 year average total return is highly impressive and is slightly better than that of Unilever (LSE: ULVR), one of its biggest direct competitors, suggesting that it could make a strong contribution to a retirement portfolio.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Reckitt shapes up:

Year founded1999*
Market cap£26bn
Net debt£1.9bn
Dividend Yield3.4%
5 year average financials
Operating margin24.4%
Interest cover98x
EPS growth16.8%
Dividend growth24.2%
Dividend cover2.2x

Source: Morningstar, Digital Look, Reckitt Benckiser

*Benckiser and Reckitt were founded in 1823 and 1840 respectively. They merged to become Reckitt Benckiser in 1999.

Here's how I've scored Reckitt Benckiser on each of these criteria:

LongevityYou have to give RB credit for its long-lived ancestors.4/5
Performance vs. FTSEVery good.5/5
Financial strengthLow debt, high interest cover and rock solid high margins.4/5
EPS growthEarnings rise steadily ahead of inflation.4/5
Dividend growthAbove average growth bodes well for long-term holders.4/5
Total: 21/25

A score of 21/25 is excellent and reflects Reckitt Benckiser's high quality management, brands and products. As a company, it is making a shift towards earning more from health and hygiene products, which offer higher margins than some of its other consumer goods. This should help it to continue to grow earnings although could broaden the range of competition it faces to include companies such as GlaxoSmithKline (LSE: GSK).

One of the challenges facing Reckitt is expanding its market share in emerging markets, where it has not been as successful as its peer Unilever. It needs to succeed in these key markets to counteract stagnant sales in Western Europe and North America. Reckitt's new CEO, Rakesh Kapoor, is refocusing the company on growth markets like Brazil and India, and the success -- or otherwise -- of this strategy is likely to play a decisive role in earnings growth in coming years.

Expert selections

Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

> Roland owns shares in Unilever and GlaxoSmithKline but does not own shares in Reckitt Benckiser. The Motley Fool has recommended Unilever.

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