3 Things to Loathe About This UK Giant
03/22/2013 7:00 am EST
These glaring faults could make a well-known British household-goods name a poor investment, writes GA Chester of The Motley Fool UK.
There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about FTSE-100 household goods giant Reckitt Benckiser (London: RB), which also trades as RBGPY in the US.
Look After the Pennies
Many FTSE-100 companies offer a Dividend Reinvestment Plan, or DRIP. A DRIP is an easy way for shareholders to use their dividends to buy more shares in the company.
The administrative and dealing costs for Reckitt's DRIP are 0.5%, not as good as Diageo's (DEO) 0.15%, but fairly typical. Also typical, Reckitt's DRIP will only buy you whole shares, with any cash left over sitting in the administrator's account earning no interest until the next dividend reinvestment date six months later.
There won't be much idle cash for companies such as Vodafone (VOD) or Tesco (TESO), whose shares are currently trading at £1.83 and £3.85, respectively. But Reckitt's shares, trading at close to £47, are the most nominally expensive of the top Footsie companies—which means you could have over £40 sitting around earning nothing.
Sure, we're not talking about a great deal of money, but it all adds up over the long term. As the saying goes, "Look after the pennies..."
From Pennies to Millions
Reckitt's long-serving boss Bart Becht retired in 2011. In the course of leading one of the Footsie's most successful companies, Becht took executive pay to new heights, including a £90 million ($136.13 million) package in 2009.
Does any chief executive, no matter how successful, deserve quite that much? And is a remuneration committee that can structure pay packages to produce that level of reward doing shareholders any favors? The committee has restructured pay for Becht's successor without admitting it was previously over-generous.
From Millions to Billions
Ten months ago, an investment company called JAB, which is controlled by descendents of Reckitt's founders, reduced its multibillion-pound stake in Reckitt from 15% to 10%.
The money followed Becht, who had gone on to head the JAB-controlled beauty-products group Coty. As one analyst put it at the time: "Now that JAB has shown its hand in favoring Coty over Reckitt, if Coty requires further funding for other opportunities, the market knows where that funding could come from."
If Reckitt's major shareholder sees potential for a better investment return elsewhere, what does that tell us?
A poor investment?
I don't think my three things to loathe about Reckitt add up to a particularly strong case against the company. The DRIP is a petty issue in the grand scheme of things. I think we're unlikely to see Reckitt's executives earn the kind of huge package Becht received ever again. And, despite reducing its holding in Reckitt by a third, JAB still holds a 10% stake in the company—at least for the time being.
I have to admit I have recently sold my personal shareholding in Reckitt, the only reason being to have some cash on hand in the event of a general market correction.