A changing fiscal world should be salve for this popular painkiller giant

Telegraph

11-07-2025

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Consumer goods company Haleon has experienced a difficult set of operating conditions since its demerger from GSK in July 2022. The FTSE 100-listed owner of popular healthcare-related brands such as Sensodyne, Panadol and Voltaren has had to contend with a period of elevated inflation across developed economies that has put severe pressure on disposable incomes.
Alongside this, a restrictive monetary policy has further dampened the spending power of consumers by acting as a drag on the economy's performance and wage growth. Consumers have, in some cases, traded down to cheaper alternatives or reduced their consumption of branded products.
Still, the stock has delivered a 26pc capital gain since Questor tipped it as a 'buy' during December 2022. In doing so, it has beaten the FTSE 100 index by 10 percentage points.
Haleon has not previously featured in our wealth preserver portfolio. However, it becomes the latest addition because of its increasingly upbeat outlook amid falling inflation and monetary policy easing.
While inflation could remain sticky across developed economies in the short run, it is widely expected to moderate so that it consistently meets central bank targets over the medium term. This should prompt further interest rate cuts that, alongside the impact of recent monetary policy easing, boost wage growth and lead to improved spending power among consumers.
In turn, this is likely to prompt reduced price consciousness that provides consumer goods companies such as Haleon with greater scope to raise prices in order to boost profit margins over the coming years.
Of course, this process is likely to be very gradual in nature. Time lags following interest rate cuts could mean the company's financial performance remains rather lacklustre in the short run.
Although its latest quarterly trading update was in line with previous expectations, organic revenue growth (which excludes the impact of acquisitions and disposals) amounted to just 3.5pc. For the full year, the company is on track to meet previous guidance – however, it expects organic revenue growth of only 4-6pc, albeit with a faster pace of increase in organic operating profits.
Next year, though, the company is forecast to post a double-digit increase in earnings per share. Given its excellent competitive position as a result of having a wide range of strong brands, Questor expects further upbeat profit growth over the coming years as trading conditions continue to improve.
Acquisitions could act as a further catalyst on Haleon's bottom line and share price. It recently completed the purchase of the remainder of its Chinese joint venture, which increases its exposure to what remains a highly attractive long-term growth market for consumer-focused companies. With Haleon in the midst of a £500m buyback programme set to be completed this year, its share price could experience further support in the short run.
Of course, some investors may argue that an improving operating outlook has already been priced into the company's shares. They currently trade on a forward price-to-earnings ratio, using current year forecasts, of around 20. Although this is significantly higher than a figure of 15.5 at the time of our 'buy' recommendation in December 2022, the combination of an increasingly upbeat growth outlook, sustainable competitive advantage and sound finances means the stock is worthy of a premium valuation.
Indeed, its net gearing ratio amounts to just 49pc. Net interest costs, meanwhile, were covered over seven times by operating profits in its latest financial year. Both figures suggest Haleon is well placed to make further acquisitions, as well as ride out potential economic difficulties over the short run.
Notably, the prospect of increasingly protectionist trade policies could weigh on both its financial performance and investor sentiment towards cyclical sectors. This company is set to release interim results later this month – it would be unsurprising if its share price becomes increasingly volatile over the coming weeks.
Questor, though, has a firmly long-term perspective. Therefore, the potential for paper losses does not dissuade us from using existing cash generated from previous sales to complete the notional purchase of Haleon in our wealth preserver portfolio. Overall, it is a high-quality company that is well placed to capitalise on the current era of persistent interest rate cuts and modest inflation.