This FTSE 250 company’s shares still look dirt-cheap to me

I’m always on the hunt for undervalued dividend stocks with serious global brand power. One that has caught my eye lately is Reckitt Benckiser (LSE:RKT). This FTSE 250 consumer goods giant, with a portfolio spanning trusted household names like Dettol, Nurofen, and Air Wick, appears to be trading at a nice discount despite its defensive qualities and promising growth prospects.

Valuation

Jumping straight to the valuation, Reckitt Benckiser’s shares are currently changing hands at a staggering 42% below fair value, according to a discounted cash flow (DCF) calculation anyway. Despite solid growth in the past, it could well be that the market is severely underestimating the company’s earnings potential and ability to compound over the long run.

The company’s primary strength lies in its incredibly diverse brand portfolio spanning health, hygiene, nutrition, and home care products sold across the globe. This diversification provides resilience against industry cyclicality and protects from overdependence on any single product category.

Strong growth

Unlike many other companies in a traditionally defensive sector, Reckitt has delivered robust earnings growth of 22% annually over last year., well above the average of the sector at only 7.8%. The difference is likely fuelled by the company’s innovation pipeline, enhanced marketing spend, and global operational footprint.

For income investors, the business also represents a rising stream of dividends flowing from its cash-generative business model. The company offers a mouth-watering 4.39% dividend yield at present, well above the FTSE 250 average of about 3%. With a reasonable 84% payout ratio, the dividend appears sustainable and backed by ample free cash flows.

Analyst enthusiasm

For a company many would consider ‘boring’, the analyst community is overwhelmingly bullish on the future here, with the consensus price target implying a potential 27.4% upside from current levels over the next 12 months.

Amit Sinha, an analyst at Macquarie, recently reiterated his ‘Outperform’ rating, citing strong pricing power amid inflationary headwinds, where many competitors have struggled:

“Despite cost pressures, we are encouraged by RKT’s ability to take pricing which has held up far better than most staple peers.”

Amit Sinha, Macquarie

Risks

Obviously, no stock is without risks, and investors should consider a few key factors. Reckitt carries a relatively high debt load after several large acquisitions recently, with a debt-to-equity ratio around 97%. With interest rates still very high, and the economy still in an uncertain place as elections and geopolitical tensions dominate headlines, there are some concerns if debt levels increase.

The company has also faced pressure on profitability recently from inflation, supply chain disruptions, and increased brand investments. I suspect the worst of this is now over, with inflation now back in line with targets, but history has shown us this can change quickly if not managed well.

However, Reckitt’s ability to pass along pricing to consumers helps mitigate some of these headwinds. Additionally, the company’s global scale and brand equity lend considerable competitive advantages over smaller rivals, which may be more dependent on demand in a single country.

Overall

Considering the well-known brand cache, impressive growth outlook, generous dividend yield, and the stock’s discounted valuation multiple, I see this as quite a compelling FTSE 250 company. Of course, there are risks, but when a company appears to be doing all the right things, I’ll be buying shares at the next opportunity.