What an interesting few days in the financial markets. As always with big market shifts, sustainability comes with the reality of the headline new information flow. Aside from the obvious efficacy of any vaccine or treatment mitigation, the key to watch out for in my humble opinion is what happens with bond yields. I know hard-nosed equity investors forget about the bond market, but the reality is that it is a multi-asset relative world. So rising bond yields associated with stronger hopes about an economic recovery have a huge impact in terms of sector choice and market rotations. And from the perspective of having a bunch more 'value' than 'growth' stocks in my portfolio, I hope it continues. I am not sure how to pigeonhole DCC plc (DCC)...
However, as I wrote back in July 'one for the bad day(s) FTSE-100 buy list...so long as they don't change their name to something more eyecatching'. A latest, first half, update is actually pretty defensive, with adjusted operating profitability up just over 8% on a year-on-year basis, helped by its Retail & Oil and Healthcare divisions, whilst its LPG division only suffered a modest decline. There are many reasons for this, mostly around the mix benefit of 'good domestic and agri demand offsetting lower commercial, industrial and transport volumes' across its British, Irish and Continental European exposures in Retail & Oil, whilst 'Health & Beauty' demand in the Healthcare division.
As the company itself put it, 'DCC’s diverse and resilient business model, the essential nature of the Group’s products and services and its extremely strong balance sheet ensure that the Group is well placed to navigate this ongoing uncertainty and continue its growth and development into the future'. Free cash flow generation was good too at £120 million in the first half of the year, helping to push debt down further. Even adjusting for lease creditors, this is down to £441 million which is not a lot more than x1 ebitda. Even with a strategy that embraces ongoing M&A, that gives plenty of headroom as free cash flow generation is running at a level which covers the current 2.5% dividend yield more than twice.
That is the thing about DCC, over the past 26 years the company has generated a free cash flow conversion rate of just over 100%, along with compounded operating profit growth over the same period of 14.5% and dividend growth of 14%. Long-term investors will surely still be fans. A low teens earnings multiple, strong cash flow and a pretty defensive profile. Forget 'value' or 'growth' headlines, think more the classic 'growth at a reasonable price'. And this is getting more reasonable. Last time I noted the stock was near the top of its reasonably recent £40-70 share price range. Now it is pretty much right in the middle. No share is a stock for all seasons but this one still feels very workable to me. I really should consider buying some.
Filed under: DCC plc, DCC, Synairgen, Manolete, Gulf Marine Services, Minds + Machines, Workspace
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