Reckitt has a health problem, and all change at Centrica

“Decent numbers from oil producer BP helped put the stock at the top of the FTSE 100 risers list, and gave support to the blue chip index alongside some help from miners. The FTSE 100 traded 0.2% higher at 7,697,” says Russ Mould, Investment Director at AJ Bell.

“Weak sterling has been fuelling a rally in the FTSE 100 as nearly three quarters of its constituents earn money overseas and so they benefit when translating that back into pounds. The index is now making a run at challenging the 12-month (closing price) high of 7,776 seen on 8 August 2018."

Reckitt Benckiser

“Investors often look at consumer goods companies like Reckitt Benckiser with a view that earnings are bulletproof. They presume that a portfolio of very popular brands equates to a guaranteed stream of rising earnings.

“Reckitt’s latest half year results throw water over that theory as revenue guidance has been downgraded to reflect a slow start to the year.

“A key problem has been reduced birth rates in China which has hit demand for its infant formula products. Reckitt bought Mead Johnson for $17.9bn in 2017 to strengthen its position in this product line and geographic territory and the company has faced considerable criticism ever since that it paid too much. Today’s announcement will only serve to strengthen the argument that the Mead Johnson acquisition was a bad deal.

“Also weighing on the results is failed execution on pushing up prices and dealing with competition.

“Companies the size of Reckitt like to think they have pricing power, meaning they can push up the ticket price for their products and not worry about demand falling. Unfortunately the strategy hasn’t worked in some places with various health products such as Dettol where it looks like competitors have undercut on price. Durex has faced tough competition from local brands in China, and Scholl remains a basket case.

“The patchy half year figures mean the incoming CEO Laxman Narasimhan has a difficult job on his hands to try and put the business back on track as well as decide the strategic future direction of the group.”

Centrica

“There is more bad news for income investors as utility group Centrica joins the list of high-yielding companies slashing their dividends.

“Anyone following the British Gas owner closely would have known that analysts have been forecasting a dividend cut for some time. Indeed, the market has also been giving plenty of warning signs with the share price trading at more than a 20 year low. A falling share price is often an indication that investors are worried about something, typically operational or financial.

“The dividend isn’t the only drastic change for Centrica as chief executive Iain Conn is leaving and the company is exiting oil and gas production, a big move which completely changes the shape of the business.

“Utility companies are going through significant structural changes and Centrica making these bold moves is necessary. The health of its business isn’t great with declining revenue, profit and cash flow.

“Conn is the thirteenth FTSE 100 CEO to announce their departure this year. The average since 2000 is 12 changes a year, which suggests 2019 could be one of the most turbulent periods for blue chip leadership given we still have five months to go.”

These articles are for information purposes only and are not a personal recommendation or advice.