Consumer spending on household goods has continued throughout the bear market, driving up the person...
Consumer spending on household goods has continued throughout the bear market, driving up the personal care and household products sector.
For the year to 21 October 2002, the sector has gained 13.98%, well ahead of the FTSE All-Share return of -21.85%, and one of only three sectors to make positive returns since the start of the year.
The outperformance has been primarily due to gains made by soap and cleaning preparations company Reckitt Benckiser, which has risen by 15% over the period, according to Bloomberg.
The company dominates the four-stock sector and is the key means for fund managers to gain exposure to UK personal care and household products, with a market cap of £7.2bn. Reckitt Benckiser manufactures and distributes household toiletry, pharmaceutical and food products in the UK, North America, Latin America, Europe, Australia, Asia and Africa.
Gartmore pan-European investment analyst Nigel Kennett says continuing top-line growth and improvement in profit margins has been driving gains in the stock.
The company reported strong third-quarter sales growth, at the top end of market expectations, following similar announcements throughout the year.
'The market has been very fragile for quite some time and is therefore prepared to pay a very high price for reliability and improving performance,' he says.
Kennett says product innovation of the 'new and improved' variety and a continued focus on marketing has helped the company increase its market share, as well as improve profitability.
'Reckitt puts a high proportion of spend into marketing ' while such expenditure has come down recently, Reckitt has actually increased theirs, which allows them to grow their market share.'
Kennett says the inelastic demand for personal care and household products made them an ideal defensive play.
'It is a classic defensive sector, because demand for the product is essentially stable,' he adds.
'It's not very economically sensitive, and people need and use the products on a regular basis, so you have always got inherent demand for this type of sector ' it does not disappear like in other areas of the economy when things slow down.'
The other stocks in the sector comprise PZ Cussons' voting and non-voting shares and soap and cleaning preparations manufacturer McBride ' the smallest by market cap at only £104m but the strongest performer in 2002, having gained 48.10% so far this year.
While the possibility of a turnaround in equity markets could dampen the ardour of the sector as defensive plays go out of fashion, few are predicting a rapid return to a more aggressive investment market.
The sector also offers further inducement via dividend yields of between 2.2% and 4.6%, which are less than unfavourable when compared with the minuscule yields offered in the money market, where long-term potential for capital gains is somewhat limited.
Inelastic demand means good defensive play.
Reckitt Benckiser improving sales.
Reasonable yields on offer.
Small number of stocks to choose from.
Equity upturn may leave sector out of favour.
Strong 2002 gains may not be repeated.
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