Should you consider adding Dulux to your portfolio?

Australians love to do their own home improvements, especially as interest in house and unit sales gathers momentum. Furthermore, even when times are tough there is always need for consumers to spend on home maintenance.

As a manufacturer and marketer of several well-known branded products, Dulux (ASX: DLX) operates throughout Australia, New Zealand, Papua New Guinea and southeast Asia, including China.  The company is a household name, as the leading manufacturer of premium decorative paint and surface coatings. It is also a conglomerate of several well-known brands including, Yates, Selby and Alesco.

Importantly Dulux is the dominant paint provider for Bunnings warehouses.  Accordingly, it is linked  to Wesfarmers’ (ASX: WES) Bunnings success story, as existing store sales increase and new warehouses are established throughout Australia and New Zealand.

Dulux has a strategy to protect and expand leading brand positions in Australia and New Zealand.  Recently it has been on the acquisition trail. In December 2012, takeover of the garage door specialist Alesco was completed. With cost and revenue synergies, this and other acquisitions are well positioned to generate strong returns. Therefore the recovery in housing sales, both new and existing, supports growth for this company through its several branded products.

Over the last three years there has been significant growth per share as measured by sales, earnings and dividends. In addition, return on equity is consistently high, although last financial year it was 41.6% compared to 43.8% previously. Nonetheless, these returns on equity are impressive.

It should be mentioned, however, that such growth does not come without risk. In particular, recent acquisitions have meant that debt is relatively high, although interest cover in the latest annual report was 5.36. This should be acceptable to most investors.

Foolish takeaway

This stock is not going to the moon but should provide reasonable dividend and share price growth for the medium- to long-term investor.

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Motley Fool contributor Chris Koenig does not own shares in any company mentioned in this article.

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