Shipping pallets are pretty boring – unless you have 470 million of them and rent them out to virtually every manufacturing supply chain.
Brambles Limited (ASX: BXB) is the company behind CHEP pallets, and as long as manufacturers rely on forklifts and standardised shelving to transport goods from the factory floor to the retail outlets, Brambles will be ringing the cash register.
My first exposure to the Brambles' business model came when I was working part-time at Mitre 10 while still at school.
Every few weeks management would get their knickers in a knot about how many blue CHEP pallets were sitting idle in the loading yard and docks, and it would usually be left to one of us juniors to stack them up ready to be transferred back to the CHEP depot.
The reason that the managers would see red every time they spotted an empty blue pallet had me baffled. It wasn't until they explained that each pallet was charged out at a rate of a few cents a day that I understood how the CHEP business could make extraordinary profits.
Even at my local Mitre 10 store, I would regularly gather up 50-odd pallets to be returned on the next semi-trailer. Not to mention the few hundred sitting on the racks still holding stock.
Multiply that by every loading yard, supermarket dock and warehouse in Australia and you are starting to see how 470 million pallets charged out at a few cents a day can add up to a company worth $17.3 billion.
The fact that Brambles provides logistics equipment to such a diverse range of industries, give it steady earnings no matter what challenges may be facing any one particular industry.
Although its business is very simple, the provision of standardised pallets is crucial to the way supply chains operate.
The ability for any forklift to load any truck with the pallets, and for the reverse to happen at the other end, means that huge investments have been made by all supply chains based on the size and specification of CHEP pallets.
That gives Brambles a huge moat for potential competitors to cross, and game-changing innovation in this field would rely on whole supply chains replacing their infrastructure.
Foolish takeaway
Brambles may look a pretty boring blue-chip, and with a dividend of 2.54% franked at 30%, you can see why many ASX thrill-seekers would turn their nose up at the humble pallet maker.
But when it comes to dominant companies with a strong record of growing profits, it is usually hard to buy them at bargain prices.
Investors who have been compounding their Brambles returns for years simply don't let that happen.
