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Here's why Reckitt Benckiser (LON:RB.) is a good long-term ISA pick

19th Mar '19 by Jack Brumby

When it comes to investing, I'm convinced it pays to buy and hold the best quality companies possible. These companies can compound investment returns at consistently above-average rates over the long term.

These stocks are different because they've got what billionaire investor Warren Buffett, calls economic moats.

In this article, I'm going to tell you what makes these stocks so special by using Reckitt Benckiser (LON:RB.) as an example. Reckitt Benckiser is a conservative, large cap in the Personal Products industry.  


Has Reckitt Benckiser (LON:RB.) got a moat?

When it comes to searching for companies with moats, some of the biggest clues actually lie in their financial statements. By looking at a small number of important ratios you can get an idea about the competitive strength and profit power in a business.

Here's what they are and why they are important - and how Reckitt Benckiser stacks up against them:

  1. High rates of Free Cash Flow - the measure of a thriving company.
    - A high ratio of free cash flow to sales can be a very positive sign. For Reckitt Benckiser, the figure is an impressive 16.0%.   
  2. High Return on Capital Employed - the measure of a company growing efficiently and profitably.
    - A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Reckitt Benckiser, the figure is an eye-catching 16.0%.
  3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
    - Reckitt Benckiser has a 5-year average ROE of 21.3%.
  4. High Operating Margins (compared to peers) - the measure of a company with pricing power
    - Reckitt Benckiser has a 5-year average operating margin of 24.3%. 

So it does seem as though Reckitt's portfolio of famous household brands might provide it with an economic moat. A quick look at Reckitt Benckiser's StockReport page shows that the company has a Quality Rank of 93 and it ranks well across our Quality metrics:


What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Reckitt Benckiser that you can find out about here.

Alternatively, if you'd like to find more shares that have some of the characteristics of promising economic moats, you should take a look at this Economic Moats screen.

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