Renovate your portfolio with this underrated blue-chip

If there’s one company in the ASX 100 that investors appear to overlook more often than not, it would have to be DuluxGroup Limited (ASX: DLX). The $2 billion market cap company was demerged from Orica Ltd (ASX: ORI) in 2010 and sells a range of paints, coatings, home improvement and gardening products to hardware and general stores all around Australia.

The company’s brands include everyday names like Dulux and Cabot’s paint, to Selleys, Garador, and even Yates garden products.

Quality and Resilience

Dulux is well known for providing quality products but is coming under pressure from larger international competitors moving into the local market. Margins have held up surprisingly well and the improving domestic housing market is expected to provide a boost to sales this financial year (which ends on 30 September).

Highlighting the domestic tailwind was the 33% improvement in first-half profit, however the result was boosted by the contribution from the acquisition of Alesco in November 2013. The acquisition was well received by the market and has given Dulux better access to the new-home market, which is forecast to remain strong in NSW, QLD and Victoria.

Alesco’s offering of garage doors and associated hardware complements Dulux’s existing product range well.

Solid Growth

The acquisition of Alesco has provided an instant boost to the group’s earnings and analysts expect the group to achieve net profit of $110 million this year, up 33% from the year before, and $123 million in 2015, another 12% growth.

This should result in the dividend increasing from 17 cents last financial year to 20 cents this year, and 23 cents in 2015. This corresponds to a yield around 4%, which is fully franked.

Dulux’s position as the domestic market leader in the traditionally boring home improvement market means that it can often be overlooked by investors. One downside is the group’s large debt load, however cashflow is strong and will support continued debt repayment. Analysts expect group debt to have peaked in the 2013 financial year and be rapidly reduced over the next two financial years.

Really, the only downside is that Dulux is trading on a price to earnings ratio of around 18.5 and could be sold down if earnings don’t match expectations when released in October.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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