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1 excellent stock for an improving economy in 2014

Speaking at Dulux’s (ASX: DLX) Annual General Meeting, Managing Director Patrick Houlihan said he sees signs of improvement in the new housing market and indicators pointing to an upswing in residential home improvement.

Broker Morgan Stanley recently predicted a housing-led recovery for Australia in 2014. This would be good news for Dulux as it derives over 65% of total revenues from the home renovations market and another 16% from new housing. It would also benefit other companies including the supplier of garden equipment, rainwater tanks and television antennas, Hills Holdings (ASX: HIL) and GWA Group  (ASX: GWA), which provides building fixtures and fittings for residential premises.

Dulux is a provider of premium branded paint, coatings, adhesives, garden care and other building products to the residential home improvement, commercial and infrastructure markets across Australia, New Zealand and Papua New Guinea. For Australia and New Zealand its revenues are boosted by being the largest supplier of paint for the ongoing rollout of the Bunnings Warehouse chain, owned by Wesfarmers (ASX: WES). It also has small but growing businesses in China and southeast Asia.

The Dulux profit release exceeded consensus broker expectations and just over one month later the share price has appreciated by 7.7% (inclusive of 9.5 cent dividend). Since its first day of trading as a listed company in July 2010, total shareholder return has been over 150%. As chairman Peter Kirby reflected, “Maintenance and improvement of existing homes has proven to be a relatively resilient part of the market, amidst more challenging conditions in the overall housing and construction market”.

Even those parts of the group reliant on new construction have achieved an increase in both sales and market share. The company also remains committed to building a profitable business in China and is looking to generate growth over the medium- to-long term.

One niggling concern has been the debt incurred in acquiring garage door specialist Alesco in December 2012. However, a promised reduction in net debt to Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) has been delivered upon earlier than expected. This year dividends increased to 17.5 cents from 15.5 in 2012, which translates to a current fully franked yield of 3.21%.

Foolish takeaway

The emerging signs of new housing construction are very positive. In addition, the reduction in debt, the passing of Alesco integration risk, the increasing dividend and the potential for Asian expansion should provide ongoing profitable growth alternatives for 2014 and beyond.

In my opinion, a medium-to-long-term investor would do well to add Dulux to their portfolio.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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