Reckitt is a true lockdown winner and Bellway revives dividends

“European markets followed last night’s poor show on Wall Street with a bad session for equities on Tuesday,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 0.3% to 5,866 while Germany’s DAX was down 0.6%. Investors increasingly seem to accept that today’s deadline for a pre-election US stimulus package will pass without an agreement.

“Investors on the UK market followed this year’s popular playbook by flocking to healthcare and consumer non-cyclical stocks, while turning their backs on energy and financials.

“With a backdrop of US elections, Brexit trade talks and expectations for tougher lockdown conditions again, it’s no wonder that markets are acting like a seesaw.

“One minute, optimism about economic recovery is high, the next it’s doom and gloom. Markets are overreacting to every data point, news update or speculation, meaning that prices are swinging up and down.

“The Vix index, which measures the market’s expectation of volatility, has been picking up in the past few weeks and it wouldn’t be surprising to see this upward trajectory sustained at least until the US election is concluded.”

Reckitt Benckiser

“Here is a true lockdown winner. Reckitt Benckiser is delivering the level of growth you’d normally associate with a relatively young business that is grabbing market share and seeing strong momentum for its products and services.

“To achieve near-20% sales growth is remarkable for a gigantic company like Reckitt and that’s exactly what it has done with its hygiene products.

“What’s also impressive is that the stockpiling of cleaning products earlier this year when lockdown measures were first announced hasn’t resulted in a deterioration of sales growth during the third quarter.

“There was the risk that people bought too much during the stockpiling frenzy in March and that demand would suffer as the year progressed, but this hasn’t happened for most of the company’s products. It suggests that the world is taking hygiene much more seriously and that’s to the benefit of Reckitt.

“Even its health products are experiencing yet another quarter of very strong sales growth, helped by ongoing demand for disinfectants and a recovery in demand for condoms as social distancing measures are relaxed in various parts of the world.

“Admittedly, demand has eased for some of its over-the-counter health products as more people stay at home and retailers already have plenty of stockpiles. But this issue is more than offset by gains elsewhere.

“There are plenty of points in its latest trading update that reinforce Reckitt’s credentials as a strong business. Improvements to its supply chain will make sure products are available when needed. It is also saving money from its productivity plan, which is also running ahead of schedule.

“What’s also positive is Reckitt’s willingness to reinvest its outperformance in the business which could reap benefits longer term.

“In nutshell, we’ve got a leaner, more efficient business selling into a market with major tailwinds – what a position to be in.”

Bellway

“The return of dividends at Bellway, albeit at a reduced level, represents the restoration of one of the key foundations of its investment case and is reflective of the big recovery in demand experienced across the housebuilding sector.

“The key question facing the company now is whether the favourable backdrop created by pent-up demand and a stamp duty holiday can last.

“A strong order book provides some visibility into next year but Bellway and the rest of the industry may be left crossing their fingers that Chancellor Rishi Sunak will extend support for the property market in 2021 given the looming jobs crisis in the UK.

“Rising unemployment always spells bad news for house prices as people’s ability and willingness to make major purchases dissipates. Mortgage availability could also become an increasing issue as lenders become reluctant to lend on the same generous terms as they have done in recent years.

“Bellway is relatively well positioned with a focus towards the more affordable end of the market and this could build some resilience into the business heading into a downturn.

“It also has a strong balance sheet and it has returned to land buying. This investment could pay off in a recovery scenario, with houses built on land bought at more depressed levels likely to generate higher levels of profitability.”

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