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.
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.
There are signs milk prices
might be turning – though
this possible inflection may have
been missed given the chaos
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.