If someone approached you to buy a stock that came with a miniscule — and unfranked — 1.3% dividend yield, and a price-to-earnings ratio twice that of the market, what would you think?
What if I said then that the business this stock represents came with a debt to equity ratio of over 120%, and that its earnings-per-share and net margins had fallen in the most recent financial year?
And finally, you can add to the mix a share price that's trading at close to all-time highs and what I'm describing hardly appears to be the 'buy' of the century, does it?
But all of these metrics are merely a snapshot in time of a business that has been one of the greatest wealth generators on the ASX in the last two decades.
Welcome to CSL Limited (ASX: CSL).
There are a lot of reasons to not buy this stock in the short-term, and a few of them I've mentioned above.
But then again, buying stocks isn't — or shouldn't — be about the short-term.
Sure, if you bought CSL in June at its all-time high of $145, you'd be down today around 10%, and I can't promise you that you won't be down another 10% in a month from now.
Just like the 'poor' investor who bought his or her CSL stock at $36 in March 2011 just to see it plummet by 28% to around $26 just six months later.
That's a serious fall in paper wealth by any measure, but I ask … are these price movements even relevant when viewing this business through the lens of multi-decade time-frames?
Given the price of CSL today is north of $131, you can see for yourself the share price return the stock has made for the investor buying in just over 6 years ago.
It's important, therefore, to not sweat the daily grind of price movements, to instead stand back and examine the much bigger picture which is the company's impressively strong economics, and let the business be run as it should … with a focus on the long-term which, in my mind, is where the big dollars are for investors in sustainably strong businesses.
The problem is, not many investors tend to hold on to their shares, because they're spooked out of their positions by negative media headlines, or because they're too impatient to wait 6, 10 or even 20 years.
The biggest thing going for CSL today is it's strong record of capital allocation within its various business divisions, a commitment to research & development (R&D), and a solid history of shareholder returns.
The interest payments are covered comfortably 22 times over by its EBIT (earnings before interest and tax), and it can demonstrate 14% compound annual growth rates in the dividend over the last ten years.
Speaking of R&D, it was no accident that net earnings fell between 2014-15 and 2015-16.
You see, there was the little matter of the company boosting its R&D spend by approximately US$150m, or 32%, over this time period.
Given CSL's exemplary track record of allocating their cash wisely, I have a lot of confidence that the current and forecast levels of R&D expenditure will add meaningfully to earnings in the next 12-18 months if analyst forecasts prove to be correct.
So, the question is: should you buy CSL?
Investors who can't hang around for 5+ years should probably stay in cash. Nervous Nellies who watch their stock prices every day should probably stay clear and instead invest their money in a broad-based index fund like the Vanguard MSCI Index International Shares ETF (ASX: VGS) or a listed investment company such as Argo Investments Limited (ASX: ARG).
If you know you can tie your money up for several years, and focus on the business fundamentals — and you only need to do this twice a year — then CSL may be right for you, no matter that the share price is today trading at around $130 and twice the valuation of the broader market.
Of course, given CSL's size, its historical returns probably won't be emulated in the future, but that doesn't mean it can't be a good investment from here on.
I'd add to positions around CSL though to develop a diversified portfolio and there's probably no better place to start than considering any of the stock picks in our report which you can obtain by clicking on the link below.
