Yesterday, I wrote about how much I admire Unilever, which I regard as one of the FTSE 100’s best-run firms. Indeed, its recent rise in market value to £122bn makes it the biggest company in the FTSE 100. Big, like small, can also be beautiful.
Quality FTSE 100 shares don’t come cheap
The point I made yesterday was that, although Unilever’s shares are far from cheap, it’s worth paying a premium for FTSE 100 quality. After all, you don’t grow to become #1 without good reason. As billionaire investor Warren Buffett once remarked: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
This FTSE 100 star is Unilever’s big rival
As for wonderful companies, Reckitt Benckiser (LSE: RB) is Unilever’s biggest British rival. Both businesses operate in broadly similar markets and territories – and both are run by high-quality management.
Speaking of quality management, Reckitt recently acquired a new boss when CEO Laxman Narasimhan took the helm last September. Thanks to the coronavirus crisis, his first year has been a trial by fire, but he seems to be doing a decent job so far.
Sales of virus-killers soar
Like Unilever, Reckitt is a global leader in sales of household and consumer goods. And, like Unilever, its cupboard is filled with big-selling brands that we’ve been buying a lot of during lockdown.
In particular, the FTSE 100 firm makes two well-known disinfectants that are leading the charge against Covid-19: Dettol and Lysol. It also makes household cleanser Cillit Bang, famous for its TV adverts starring Barry Scott.
Panic-buying (or pandemic-buying) saw Reckitt’s like-for-like revenues soar by 11.9%, up from just 1% a year earlier. Hygiene products to kill the virus took the lead, with revenues leaping by 16.1% year-on-year. As a result, first-half earnings leapt 15% to £1.7bn, with adjusted operating profit climbing 6.4% to £1bn for the half-year.
What’s more, with cleanliness and hygiene practices at the forefront, sales growth is likely to remain elevated for the foreseeable future. Then again, due to social distancing, sales of Durex condoms and Scholl footcare products fell modestly. But I suspect that Reckitt’s Nurofen painkillers helped with stress-related headaches.
Reckitt can be a FTSE 100 fortress
In the past, Reckitt has sometimes disappointed with downgraded earnings – and with its recent acquisition of baby-formula maker Mead Johnson. However, strong sales growth combined with industry-leading margins offer a potent mixture for future profitability.
As I remarked earlier, FTSE 100 quality doesn’t come cheap, but it’s certainly worth paying for. At their current £78, Reckitt’s shares trade just 2.6% below their 52-week high of £80.05, set last week (on 23 July).
Over the past year, they are up an impressive 20.4%, versus a 20.3% fall for the FTSE 100. That outperformance has pushed Reckitt’s market value to £54.9bn, taking it to #10 in the FTSE 100 league table by size.
Buying Reckitt shares at their 12-month low of £51.30 on 12 March would have been a no-brainer. Even at £78, I believe they have their attractions, including a yearly dividend yield of 2.3%. And, unlike many of its FTSE 100 peers, Reckitt has not cut, suspended or cancelled its cash dividends.
Reckitt could be a future diamond and, like diamonds, I think it’s worth paying a little extra for the best. That’s why I’d buy and hold Reckitt shares today.