Relx is one of the unsung heroes of the FTSE 100. The data and analytics business has a bigger market capitalisation than the likes of GSK, BAE Systems and Lloyds Bank, and it has rewarded its shareholders handsomely. The stock has delivered a total return of more than 104 per cent in the past five years, compared with 37 per cent by the FTSE 100 index.
The company makes relatively few headlines, and Erik Engstrom, the Swede who has led the business for the past 14 years, has never given a media interview as its chief executive. But it is this quiet, disciplined approach that has built Relx’s reputation as one of the most impressive technology names in the UK.
Although Relx calls itself a data and analytics business, this barely scratches the surface of how the multibillion-pound company makes money. Known as Reed Elsevier from 1992 until 2015, it was once a producer of books and magazines but has made a gradual transition away from physical media, selling one of its last print magazines in 2019. Now, 84 per cent of revenues are digital, with only 4 per cent in print, and 12 per cent comes from face-to-face events.
Relx now has four divisions: scientific, technical and medical (otherwise known as “STM”); risk; legal; and exhibitions. STM includes its academic publishing business, Elsevier, with a portfolio of more than 2,200 journals. The risk division covers the company’s analytics and decision tools for areas such as digital fraud and identity checks. The third unit provides legal, regulatory and business information and analytics. These three businesses are the foundation of Relx’s huge archive of content and data. The fourth and smallest division is exhibitions, a face-to-face events operation.
One big appeal of Relx is that most of its customers pay a recurring fee for access to its products — whether for a log-in to the academic publishing portal, or to get into the database of legal documents. About 54 per cent of its revenues are subscription based, which has translated into a gross margin that has averaged 61 per cent over the past five years.
The company’s recent half-year results showed overall steady growth, with revenues rising by 7 per cent on an underlying basis. But the focus for investors was organic growth in its legal division coming in at 7 per cent, compared with 6 per cent in the same period last year and ahead of expectations. Management credited this in part to Lexis+, its legal research platform, as well as the launch of its Lexis+AI platform, which incorporates generative artificial intelligence.
Investors are also hoping that growth in the STM business will accelerate. For the first time, Relx published the number of article submissions to Elsevier, which rose by 20 per cent in the first half, after a 12 per cent increase in 2023 and 7 per cent in 2022.
Relx trades at 29 times forward earnings, compared with an average multiple of 12 in the FTSE 100. This reflects an impressive track record of creating value for shareholders. Capital expenditure typically sits at 5 per cent of sales, which has supported an average growth rate in operating profit of 14 per cent over the past three years.Meanwhile, operating margins have ticked up from 30.5 per cent to 33.1 per cent in the same period.
It is worth noting, too, that Relx has returned plenty of cash to its investors. It is expected to yield a modest 1.9 per cent over the next 12 months, but dividends in cash terms reached £1.1 billion in 2023, with the interim dividend this year up by 7 per cent at 18.2p a share. For this level of quality and dependability, Relx still looks worth the price. Advice: BuyWhy: Strong quality and record of creating shareholder value
Reckitt Benckiser
Shares in Reckitt Benckiser are trading at lows not seen in more than a decade, as the consumer goods group has been tangled by litigation in its baby formula division.
As the £29 billion group sets a restructuring programme in action, and explores selling its problematic baby formula business, the question for stockpickers is whether its investment case as home of some of the biggest British consumer brands can be salvaged.
This year a jury in the United States decided that one of the company’s infant formulas had caused the death of a premature infant, ordering it to pay $60 million damages to the mother. This opens it up to possible liability claims that analysts believe could range from £400 million to £3 billion.
Reckitt has put the baby formula division, as well as products such as Cillit Bang and Airwick Air Fresheners, in effect up for sale. The hope is that Reckitt will be able to thrive on a slimmer, more focused portfolio of “power brands” — big brand names that already have a strong foothold in the West but that can pursue growth in emerging markets. These include Nurofen, an ibuprofen brand, and Dettol cleaning products.
The company also has problems elsewhere to grapple with, including recent tornado damage to a warehouse for its infant nutrition business in Indiana. Meanwhile, operational performance has been mixed. Health and nutrition revenues fell by 4 per cent and 11 per cent respectively in the first half of the year, while hygiene sales were mostly flat. The gross margin improved by 1.2 percentage points to 60.6 per cent, and a 5 per cent drop in adjusted operating profit was better than expected.
Reckitt shares trade at 13 times forward earnings, at a discount to its consumer goods peer Unilever, which trades at 19, and its own ten-year historical average of 20. This may lure in value investors, but management needs to find the right buyers for its less impressive brands, as well as to refresh the performance of those that it has decided to keep. Even at this price, Reckitt shares look too risky to dive for. Advice HoldWhy Discount reflects high uncertainty