Stocks poised to prosper despite the Brexit gloom: Reckitt, Diageo and Dairy Crest

Reckitt Benckiser

Reckitt Benckiser is a simple, predictable business. It has until recently been dominated by the differing views on the future of Indivior – its pharma arm. Some analysts argued it is a dead duck, others, a beauty.

From experience, businesses harbouring a quantitatively small source of high anxiety often get mispriced. The narrative creates disproportionate anxiety and distracts focus from what really matters. For Reckitt, the Indivior story recently became irrelevant. After years of procrastination, the business was finally spun out, leaving Reckitt unencumbered. Now it can be viewed like any other quality and resilient business offering a little growth: boring. But boring is good. The new Reckitt will continue to be rewarding, as analysts and investors underappreciate the rarity of such businesses.

Diageo

The last few years have been tough in terms of operational performance for Diageo as EM growth has slowed. This sales slowdown has also been exacerbated by a muchneeded adjustment in supply chain inventory. However, we think the long-term investment case remains compelling. Diageo currently provides a dividend yield of 3%, well supported by free cash flow, and the long-term potential for dividend growth is very good.

The most recent dividend increase was 5%. In the near-term there are also some positive dynamics at play. Diageo ’s US sales are improving and the recent fall in sterling provides a tailwind for cash flow and dividends, given its global footprint. The US is Diageo ’s most important market and represents about one third of sales and more than 40% of profit.

Dairy Crest Group

There are signs milk prices might be turning – though this possible inflection may have been missed given the chaos surrounding Brexit. More specifically regarding the referendum, Dairy Crest Group should be a net beneficiary of Brexit, at least from a currency perspective. Weaker sterling both increases the value of Dairy Crest’s exports of demineralised whey protein and galactooligosaccharide, as well as diminishing the attractiveness of imported cheddar competing with Cathedral City.

In addition, we feel Dairy Crest’s specialist high-margin business could well prove attractive to a potential acquirer. If such an acquirer operates in a currency other than sterling, then Dairy Crest Group now looks considerably more attractive than it has in recent months.