Let’s take Britain’s leading oil company, and pitch it against a global consumer goods giant. Which company wins?
BP (LSE: BP) is a stalwart of most UK pension funds. Reckitt Benckiser (LSE: RB) is a blue chip that has emerged from virtually nowhere. Which is the better investment? Let’s start with BP.
BP
This company needs no introduction. BP is one of the UK’s leading companies. The number of cars in the world is steadily rising. Almost all of these vehicles are petrol or diesel-driven. So oil companies seem a good investment.
What’s more, this oil major’s fundamentals are strong: a 2015 P/E ratio is 13.74, falling to 10.08 in 2016. But what is most enticing about this share is the dividend yield, which is forecast to be 7.61%.
However, dig a little deeper and things are not so rosy. The elephant in the room is the falling oil price. When the price of Brent crude falls from $130 per barrel to just $47 per barrel in the space of seven years, you realise that BP is not as attractive an investment as it first seems.
After all, it is profitability that drives share price growth, and with the oil price this low, many (if not most) of BP’s planned and current projects are no longer profitable, and thus no longer viable.
This has meant that BP is a company in retreat. It is withdrawing from the most expensive drilling projects, and focusing its money on the lowest cost oil fields. Profitability is falling dramatically, which is likely to mean that P/E forecasts are over optimistic, and that tempting dividend is likely to be cut.
This is a company that is cheap, but which is likely to get cheaper.
Reckitt Benckiser
If you want to understand momentum, then you should take a look at Reckitt Benckiser. Since 2000 the share price has increased an astonishing 10-fold. This is a firm that has rocketed dramatically in an industry which has traditionally been staid and slow growing.
Its main competitors are Unilever and Procter & Gamble, businesses which have been around nearly a century. But Reckitt Benckiser is a company that has a uniquely strong focus on growth.
Whereas other firms have brands which have been around for decades, Reckitts regularly thinks up innovative new products which are backed up by aggressively targeted research and punchy marketing.
This has meant the share price has just kept on rising. At the current price of 5697p, the 2015 P/E ratio is 23.69, and the 2016 P/E ratio is 22.18. The dividend yield is 2.11%, rising 2.26%.
This is a very highly rated company, and rightly so. But I just wonder whether, in the future, this company will settle down to a lower growth rate. The P/E multiple is demanding, and I can see that earnings in 2015 are likely to be lower than what it was in 2012. I can find better buys elsewhere.
Foolish bottom line
These are both renowned companies, which many fund and pension managers have bought into. Yet I fear BP is set for a slow decline, while Reckitt Benckiser is a fantastic business that is just too pricey.
So which would I buy into? Well, I try to choose my FTSE 100 investments very carefully, and I think you should do the same. I would currently invest in neither of these companies.