The Motley Fool

Why I think DuluxGroup Limited shares look a buy

A proven strategy for investors considering buying shares in DuluxGroup Limited (ASX: DLX) is to buy for yield and hold for growth. I expect this magic formula to continue as we approach this year’s full results, which will be announced to the market next Wednesday.

Any weakness could be an opportunity for long term investors.

DuluxGroup is the owner of well-known consumer and commercial brands such as Selleys, British Paints and, of course, Dulux.

The company always seems to defy expectations that any slowdown in house price growth will hinder it. This is because 65% of its day to day business is in home improvements, which, far from being cyclical, have proven time and again to be defensive.

One of the key strengths of DuluxGroup is that its brand power enables it to generate above industry EBIT margins. This allows it to invest heavily in its business to perpetuate these margins. For example, last year, of the $166m operating cashflow that the group generated, it invested $85m in capital expenditure.

The main recipient of this capital investment has been a major new paint facility that is expected to open shortly within its $165m budget. The scale and efficiencies that this will provide will give the company a long term competitive advantage in its core market.

The rest of its cashflow goes back to shareholders in dividends. Last year DuluxGroup was able to raise its dividend 8% to 26 cents.

The shares trade on a prospective grossed-up dividend yield of 5.0%. Dividends have already risen 62% in the last six years. While past performance is of course no predictor of the future, it’s about as good a guide as we have to where future dividends are likely to head.

Foolish takeaway

On the face of it, a rating of 20.5x is hardly cheap. However, Dulux Group is one of those high-quality stocks that always seems to end up looking cheap in 2-3 years’ time. That’s what makes it a core industrial holding in long term investors’ portfolios.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor James Middleweek has no financial interest in any company mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

One ASX Stock For An Estimated $US22 Billion Marijuana Market

A little-known ASX company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

And make no mistake – it is coming. To the tune of an estimated $US22 billion.

Cannabis legalisation is sweeping over North America, and full legalisation arrived in Canada in October 2018.

Here’s the best part: we think there’s one ASX stock that’s uniquely positioned to profit immensely from this explosive new industry… taking savvy investors along for what could be one heck of a ride.

AND, this is the first time The Motley Fool Australia has EVER put a BUY recommendation on a marijuana stock.

Simply click below to learn more on how you can profit from the coming cannabis boom.

Click here to find out more