As investing champions like Warren Buffett and Terry Smith preach, no company is worth buying at any price. That’s why I think it’s always a good idea to have a list of stocks you’d purchase on any sustained period of weakness in the market. Perhaps concerns over the impact of coronavirus on the global economy may give investors that opportunity in time.
Two firms that feature on my own watchlist are FTSE 100 pest control business Rentokil Initial (LSE: RTO) and FTSE 250 kitchen supplier Howdens Joinery (LSE: HWDN), who both released results to the market today.
Ongoing revenue at £9bn-cap Rentokil rose 8.6% at constant currency to £2.68bn over 2019. Positively, 4.5% of this was organic (generated internally rather than through acquisitions) and driven by “increasing presence in growth markets, higher levels of customer retention and a strong innovation programme.” Pre-tax profit came in at £338.5m.
Considering the non-cyclical nature of its business, I consider Rentokil’s outlook to be very positive. Indeed, according to CEO Andy Ransom, “key demographic trends such as urbanisation” should lead to more growth in pest control and hygiene markets across the globe.
Given all this, it’s perhaps no surprise that the company saw fit to hike its final dividend to 3.64p per share. This brings the total payout for the 2019 financial year to 5.15p per share, representing a 15.2% increase on the previous year. While Rentokil’s 1.1% yield remains very low relative to some in the FTSE 100, the fact that it’s regularly increasing its dividends is a very positive sign, in my book.
All told, I remain very interested in acquiring a slice of this company. That said, 32 times forecast earnings does seem quite a high price to pay in such as nervous market. It stays on the watchlist for now.
Like Rentokil, today’s numbers from Howdens were also positive, with group revenue rising 4.8% to £1.58bn and pre-tax profit moving a very solid 9.3% higher to £260.7m.
Like Rentokil, this is a company with strong growth prospects. Having opened 44 depots in 2019, Howdens believes it can increase its presence in the UK from 732 to 850 depots while also developing its digital platform.
Like Rentokil, Howdens is also a reliable dividend hiker. Today’s final dividend of 9.1p per share brought the total payout to 13p per share — a little over 12% higher than in the 2018 financial year.
What I particularly like about Howdens though, is its financial discipline. The £4bn-cap boasted £267.4m of net cash on its balance sheet at the end of the year — just the sort of thing that would give me confidence if a downturn in the economy is coming.
Whether this happens as a result of the coronavirus is, of course, hard to say. With regard to the outbreak, Howdens said it was “monitoring” its supply chain and had increased stock levels from product it sources from China. It had also taken steps to find alternative sources of supply. This all sounds very prudent to me.
Again, however, the valuation needs to be considered. Having done so well over the last year, Howden’s stock now trades on almost 19 times earnings. Although nowhere near Rentokil’s valuation, that’s still fairly high, relative to its industry. As such, I’m hoping for a cheaper entry point in the next few months.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020