Shares of CSL Limited (ASX: CSL) have once again resumed their long history of outperforming the broader market and are now fetching a record price of close to $115 per share.
The biopharmaceutical giant is one of the true Australian success stories and has both the reputation, and geographic reach, to compete on a global scale.
Not only does the company provide products that help the lives of millions of people, CSL has also delivered exceptional returns for shareholders. In fact, it has been one of the best-performing stocks on the ASX over the past 10 years having delivered, on average, a total shareholder return of 23.1% each year.
Although investors often complain that the shares are too expensive or the dividend yield is too low, this has not stopped the shares from continuing to make new record highs over a very long period of time.
Here are just five reasons why I think investors are willing to pay a premium for CSL shares:
- Consistent Earnings Per Share (EPS) Growth – Ultimately, CSL's increasing share price has reflected the company's ability to consistently increase its EPS. As the simple graph below demonstrates, CSL has nearly doubled its EPS over the past five years.
Source: CSL Presentation Even more impressively perhaps, is the fact that CSL has been able to quadruple its EPS over the past 10 years. It is unsurprising, therefore, to see the rapid increase in the share price during that time.
Investors should also note that the company has undertaken a number of share buy-backs which has reduced the number of shares on issue by around 27%. This has also been a driving force behind increasing the company's EPS and a $1 billion buy-back is currently underway.
- Geographic Diversification – CSL's operations are not limited to Australia and this presents huge growth opportunities for the company.
Source: CSL Presentation As the slide above shows, CSL already has a strong presence in the North American market and this is the most lucrative healthcare market in the world. The company also has a growing presence in Asia and Europe.
- Lower Australian dollar tailwind – Even without the help of a falling Australian dollar, CSL has still been able to deliver both sales and earnings growth in constant currency terms. With that said, the company reports its earnings and dividends in US dollars so the recent fall of the Australian dollar has been a tailwind for Australian investors.
- Product Diversification – Unlike other biopharmaceutical companies, CSL has a broad range of treatments in a number of different disease categories.
In my opinion, this makes CSL a far less risky investment proposition than other companies that operate in the same market. Importantly, CSL has a number of significant products that are due to be launched over the next 12 months and these products are expected to accelerate earnings growth from FY17 and beyond.
- Increasing return on equity (ROE) – CSL has typically paid out less than 40% of its profits to shareholders as dividends and this has actually benefited shareholders in the long term. Instead of paying out higher dividends, the company has been able to reinvest those funds and generate a significantly higher return on those funds than could otherwise have been achieved. It has been able to do this year after year and this has seen CSL's return on equity increase from 25% in 2010 to 49% in 2015.
Foolish takeaway
I think investors are likely to remain strong supporters of CSL even though it currently trades at a price-to-earnings ratio of around 30.
The company has an impressive pipeline of new treatments and a track record that is second to none. While some investors may find it difficult to comprehend CSL's current valuation, I would not be surprised to see the shares trade significantly higher over the coming years.
