Lloyds beats expectations and Reckitt faces post-Covid growth challenge

“At one point yesterday, it looked like another terrible day for tech stocks in the US, yet the Nasdaq managed to claw back losses to end the day just 0.5% lower. That helped to avoid a period of panic among investors and most of Europe held firm on Wednesday,” says Russ Mould, Investment Director at AJ Bell.

“Asia didn’t fare as well. Hong Kong’s Hang Seng index which slumped 3% as tech-related stocks sold off. The worst performer was stock exchange operator Hong Kong Exchanges and Clearing which dived 8.8% on news of a tax hike on stock trading in the region.

“The FTSE 100 slipped 0.7% with banks, pharmaceuticals and miners weighing on the index. The pound continued to strengthen, rising 0.5% against the US dollar to $1.4188. Travel stocks enjoyed another day in the sun with the likes of EasyJet and International Consolidated Airlines flying higher on reports of strong holiday bookings following England’s roadmap to coming out of lockdown.”

Lloyds

“As a sign off from long-standing chief executive Antonio Horta-Osório, Lloyd’s 2020 results are not too shabby.

“Expectations were not pitched too high but it is still an achievement that the numbers cleared this low bar and ultimately his tenure is likely to be remembered by investors for the return of the dividend – before last year’s pandemic-induced interruption – and its return to private ownership following the 2007/8 global financial crash.

“If Horta-Osório led the company out of one crisis, his successor Charlie Nunn will be leading it out of another as he looks to put the Covid-19 pandemic in the rear-view mirror.

“However, like the rest of the sector Lloyds is unlikely to enjoy a smooth drive back to normality thanks to a very unhelpful set of circumstances.

“Interest rates are through the floor, squeezing margins; its ability to pay out dividends is constrained by the regulator; and bad debts have spiralled as a result of the economic impact of coronavirus.

“To be fair to Lloyds it is not just sitting on its hands bemoaning its predicament or waiting around until the new CEO gets behind the wheel – there is already a plan to boost its footprint in areas like insurance and wealth management and invest in improving its technology.

“Today’s statement is light on financial targets – presumably to give the incoming chief executive some wiggle room when he takes over this August.

“In many ways Lloyds is a simpler business than it was a decade or more ago and while this is a positive thing it puts a lot of onus on getting the basics of banking right and having flawless execution.”

Reckitt Benckiser

“With the world’s attention firmly fixed on coming out of the pandemic and life returning to normal, Reckitt Benckiser will be praying that greater attention to cleanliness and hygiene seen over the past year won’t fade away.

“It cites figures that suggest four in five people say they intend to continue with their improved habits after the pandemic is over. It’s easy to say that now when the pandemic is still front of mind, yet fast forward 12 months and consumers could easily slip into old habits and not be as fussed about using antibacterial gel regularly throughout the day or making sure their homes are free of germs to the same extent as 2020.

“The rate of sales growth in its latest results will be tough to beat and Reckitt is fully aware of the challenges ahead. Coming off the back of such strong sales momentum, now is the time for the business to sharpen its focus and get rid of the weaker components. Its China baby formula business is now under strategic review and its footcare brand Scholl is being sold.

“Despite being a Covid winner with significant boost in hygiene-related sales because of the pandemic, Reckitt’s share price has been drifting since last summer. The market has been looking into the future and focusing on companies on lower earnings multiples with the potential for higher growth, known as value stocks. Reckitt tends to be lumped into the ‘expensive defensive’ camp where growth rates tend to be more pedestrian in a normal year.

“Its latest update triggered a positive market reaction, but there is still the lingering question of whether it can deliver sustainable growth over the longer term, particularly as competition is tough in many of its product areas.

“Getting rid of the Chinese baby formula business would draw a line under one of the biggest mistakes in Reckitt’s history – namely overpaying for Mead Johnson in 2017 – and allow the business to shake off long-held criticism over the deal and shift the market’s attention to brighter parts of the group.”

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