In 1999 Reckitt & Coleman merged with Benckiser to form Reckitt Benckiser (LON:RB.). At the time Reckitt & Coleman were a leading global household products company with most of their turnover generated by brands with number one or two market positions. Benckiser was in a similar position with household cleaning products, especially their dishwasher brands including Finish, and the water softener Calgon. At the time the CEO to be, Bart Becht said "Reckitt Benckiser will be the world number one household cleaning company and has the potential to create significant value for shareholders" and that "the merged company will benefit from new growth opportunities and a clear growth strategy, through focus on high growth core categories, raising the rate of innovation and brand investment, and from cross selling opportunities and scale benefits".
Over the last decade the merged company has pursued a strategy of focusing on a small number of world leading brands in growth markets and backing those brands with lots of marketing and product innovation. To say that the strategy has worked would be an understatement. Since 2000 turnover has grown from £3.1 billion to £8.4 billion, profit before tax has gone from £500 million to £2.1 billion and the dividend has gone from 25 pence to 115 pence. In the last ten years revenue and profit have grown in every year and the dividend has increased in all years bar one. Earnings have grown by more than 15% a year.
And there's more. Return on shareholder equity has averaged 35% and that figure has been achieved with little gearing. Free cash has been generated in every one of the last ten years and capital expenditure has averaged only 13% of cash flow. Free cash has also grown in eight out of ten years. That's a nice history to have, but investing is about the future, not the past; so before I get out my crystal ball and look deep into the future, what are the odds that it will look anything like the past?
For a start, many of their products have a durable competitive advantage, mostly due to the strength of their brand names. Brands like Durex are used as generic terms for the products they represent, and that's a big advantage. However, most of their products do not have a low cost durable competitive advantage. Products like Dettol, Clearasil, Vanish and…
