A proven strategy for investors considering buying shares in DuluxGroup Limited (ASX: DLX) is to buy for yield and hold for growth. I expect this magic formula to continue as we approach this year's full results, which will be announced to the market next Wednesday.
Any weakness could be an opportunity for long term investors.
DuluxGroup is the owner of well-known consumer and commercial brands such as Selleys, British Paints and, of course, Dulux.
The company always seems to defy expectations that any slowdown in house price growth will hinder it. This is because 65% of its day to day business is in home improvements, which, far from being cyclical, have proven time and again to be defensive.
One of the key strengths of DuluxGroup is that its brand power enables it to generate above industry EBIT margins. This allows it to invest heavily in its business to perpetuate these margins. For example, last year, of the $166m operating cashflow that the group generated, it invested $85m in capital expenditure.
The main recipient of this capital investment has been a major new paint facility that is expected to open shortly within its $165m budget. The scale and efficiencies that this will provide will give the company a long term competitive advantage in its core market.
The rest of its cashflow goes back to shareholders in dividends. Last year DuluxGroup was able to raise its dividend 8% to 26 cents.
The shares trade on a prospective grossed-up dividend yield of 5.0%. Dividends have already risen 62% in the last six years. While past performance is of course no predictor of the future, it's about as good a guide as we have to where future dividends are likely to head.
Foolish takeaway
On the face of it, a rating of 20.5x is hardly cheap. However, Dulux Group is one of those high-quality stocks that always seems to end up looking cheap in 2-3 years' time. That's what makes it a core industrial holding in long term investors' portfolios.
