Investors should take a closer look at Reckitt as an inflation hedge

Rising costs are hitting every corner of the global economy. Businesses large and small are struggling to manage these pressures, although some are better placed than others to pass on costs to consumers.

Reckitt Benckiser Group (LSE: RKT) seems to be one of those organisations that can pass on costs. The FTSE 100 manufacturer of Dettol, Nurofen and Durex is shrugging off inflation in its supply chain.

In the first quarter of 2022, like-for-like sales increased by 5.6% overall with price rises contributing 5.3% and volume adding another 0.3%. More importantly, management believes sales growth for the year as a whole will be at the top of its 1% to 4% target range, and Reckitt will be able to maintain its adjusted operating margins as it hikes prices to offset rising input costs.

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Margin performance shows Reckitt’s strengths

It looks as if the buyers of Reckitt’s health and cleaning brands have not been put off by higher prices.

Indeed, they seem willing to pay more for its branded products, although as the cost of living squeeze continues, this might not last. There is plenty of evidence showing that consumers tend to trade down to supermarket own-brand products and other cheaper alternatives when disposable income comes under pressure. There’s no guarantee this trend will play out, but it’s something investors need to keep in mind. If real incomes keep falling, and the firm keeps raising prices, volume growth could disappear.

Still, Reckitt’s outlook is more upbeat than that of its FTSE 100 peer, Unilever (LSE: ULVR). Both companies are facing the same headwinds. However, Unilever expects its operating profit margin to fall to the lower end of its previously forecast 16% to 17% range for 2022 as it deals with supply chain issues. I’ve taken a closer look at Unilever’s first quarter performance and what it means for investors here.

Unilever's forecast stands in contrast with Reckitt’s outlook. One of the reasons Unilever is feeling the heat is its presence in the food and beverage categories, where ingredient inflation is running much hotter.

A key ingredient of many of the company’s products is palm oil, which has doubled in price over the past year. And there could be further pain ahead for Unilever as the world’s largest buyer of palm oil.

Around 90% of the world’s palm oil comes from Indonesia and Malaysia, but Indonesia has just announced an export ban. This ban has the potential to exacerbate global supply issues and push prices up further.

Reckitt is positioning itself for growth in a tough market

Considering Unilever’s challenges, Reckitt looks to be the better buy of the two, although I own both in my portfolio.

To help boost growth, the FTSE 100 company is managing its portfolio for “high growth”, which involves divesting brands that are not living up to expectations. To that end, Reckitt recently divested the Dermicool and E45 brands for £240m.

There are also rumours that Reckitt is looking to offload the remainder of its baby formula business. This has been a thorn in its company’s side since it agreed to acquire Mead Johnson in 2017. The $16.6bn deal was supposed to open up a new growth market for the group, but it has failed to live up to expectations. New regulations in China favouring local rivals also damaged its growth prospects.

Reckitt has written the value of the business down by $10bn and sold the China arm for $2.2bn. The remainder of the baby formula business could be worth $7bn to $10bn according to analysts. A deal would draw a line under this messy chapter and allow management to re-focus their efforts on the rest of the business.

According to FactSet, analysts believe the company will report earnings per share of 298p in 2022 and 323p in 2023, putting the stock on a 2023 price/earnings (p/e) multiple of 19.3, roughly inline with peer Unilever. Considering Reckitt’s defensive qualities, sales growth and margin performance in a tough environment, I think that undervalues the business. It also offers a dividend yield of 2.8%.

As uncertainty stalks the global economy, Reckitt could provide a safe haven for investors.

Disclosure: Rupert Hargreaves owns shares in Reckitt and Unilever.

SEE ALSO: Inflation is hurting Unilever, but investors shouldn’t give up just yet