Blue-chip companies have long been Australian market darlings. Considered as the highest quality companies, blue-chips have typically offered steady growth and regular dividend income which have made them favourites among many investors. However, the prospects – and share prices – of many traditional blue-chip companies on the ASX have wavered. One might question whether companies such as Woolworths Group Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), and Telstra Corporation Ltd (ASX: TLS) are showing enough signs of growth to warrant a continued presence in buy-and-hold portfolios.
There is, however, another company on the ASX that is well run, offers steady growth, and provides a meaningful income stream.
DuluxGroup Limited (ASX: DLX)
The Dulux Group manufacture and market a range of paints, coatings, and home improvement products. Its brands include mostly premium products and include a wealth of brands that you've likely used, or at least, are familiar with. DuluxGroup own painting and coatings brands Dulux, British Paints, Cabot's, Berger, Feast Watson, Porter's Paints, and Craig and Rose. It also owns home improvement brands including Selley's, Poly, Polyglaze, and RotaCota. DuluxGroup operate a garage doors and openers segment which includes the brands Automatic Technology, Garador, B & D, and Dominator, as well as a Lincoln Sentry segment which supplies and distributes cabinet and architectural hardware. Lastly, DuluxGroup owns a range of prominent garden care brands including Yates, Hortico, Watkins, and Ratsak.
Despite marginal increases in the number of shares outstanding over recent years, the DuluxGroup have been able to increase EPS for the last six years. It has done this by more than doubling total revenue since 2010, and increasing its net profit margin by around a third from 6.3% to 8% since 2013. Operating margin has remained steady at around 14%.
Importantly, the DuluxGroup has provided shareholders with strong returns on their equity at around 35% over the last three years, as well as robust returns on invested capital at around 26%. That these returns have remained strong over time is a good sign for shareholders, and indicates that DuluxGroup is providing returns that far exceed the cost of capital, and are therefore capable of creating shareholder value. Strong growth in intrinsic value should follow over the long term.
DuluxGroup are forecast to pay a fully franked dividend of 28 cents per share this year, a 3.7% return on the current share price.
One potential red flag has been the levels of debt carried by the company. DuluxGroup currently sit at a debt to equity ratio of 91%. However, the company has shown some ability to pay down that debt, which has decreased over recent years.
Foolish Takeaway
DuluxGroup offer shareholders a fairly consistent business with a wide range of well-branded products. It offers steady growth and a consistent dividend. As long as debt to equity continues to fall, strong returns on invested capital should see long term growth in intrinsic value for shareholders, and may be suitable for almost all buy-and-hold investors.
