One huge reason to own CSL shares

Blood product company CSL Limited (ASX:CSL) is still earning monster returns on equity.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There can't be many ASX listed blue-chip stocks in better shape than blood product company CSL Limited (ASX: CSL).

In the 2018 financial year, CSL increased reported sales revenue by 15%, invested US$700 million into research and development and paid out US$672 million in cash dividends to investors.

On their own, these are signs of a strong, cash-rich business. Together they represent something we should all be on the hunt for as investors: a sustainable competitive advantage.

a woman

A growing history of strong returns on equity

Businesses with sustainable competitive advantages can grow and compound at above-average returns for long periods and CSL is a perfect example.

In the 2018 financial year, CSL produced a monster return on equity (ROE) of 42%, completely blowing away the 6% average for U.S. healthcare product companies. And this wasn't just a one-off. Below we can see how the company's ROE has held up over the previous financial years:

CSL Limited (All USD) 2018 2017 2016 2015 2014
Net Income ($m) 1,729 1,337 1,242 1,379 1,307
Total equity ($m) 4,080 3,164 2,567 2,746 3,162
ROE 42% 42% 48% 50% 41%

Source: CSL Ltd 2018 Annual report

It's revealing to see how consistent CSL has been in maintaining a high ROE, but there are other insights here too.

First, we can see the drop in both net income and equity between 2015 and 2016. This occurred as CSL began investing into its newly acquired Seqirus Influenza business, reducing net income and taking on more debt. Both points show that CSL was reinvesting for long-term growth which the business is starting to reap today.

We can also see a big increase in the company's equity in 2018 which is almost entirely from retained earnings as the company's value increased. Remember how CSL paid out US$672 million in dividends last year? Well with reported net income of US$1.73 billion, cash that wasn't distributed to investors was being reinvested, lifting assets and thus shareholder equity.

Foolish Takeaway

Tracking metrics like return on equity over time help to monitor if a company is maintaining or growing its competitive advantage. In the case of CSL, the ongoing strong returns and growing equity base are a great reason to want to own the company today.

Motley Fool contributor Regan Pearson has no position in any of the stocks mentioned. You can follow him on Twitter @Regan_Invests. 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 Scott Phillips.

More on ASX Share Market News

Australian dollar notes and coins in a till.
Broker Notes

Should I buy Coles shares for passive income?

A leading expert provides his forecast for Coles outperforming shares.

Read more »

Codan share price A dismayed kid dressed as a scientist stands with his back to a rocket crashed into the ground
Share Fallers

Xero shares crash to a 7-year low after a brutal sell-off

The decline has wiped out years of share price gains.

Read more »

Buy, hold, and sell ratings written on signs on a wooden pole.
Broker Notes

Up 52% and paying dividends: Are BHP shares a buy, hold, or sell today?

A leading expert provides his forecast for the surging BHP share price.

Read more »

A woman's hand draws a stylised 'Top Ten' on a projected surface.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a mild but positive start to the week's trading today.

Read more »

A man surrounded by huge piles of paper looks through a magnifying glass at his computer screen.
Opinions

CSL shares are back near $180. Here's the level I'm watching

CSL shares are nearing a key technical level after a strong rebound.

Read more »

A girl is looking very confused, with one eyebrow raised saying what?
Capital Raising

Why is this ASX lithium stock crashing 10% on Monday?

A big update has put this lithium stock in focus.

Read more »

Sell written several times on board.
Broker Notes

Sell alert! Why this expert is calling time on Tabcorp and NAB shares

A leading expert believes Tabcorp and NAB shares are likely to underperform into 2027.

Read more »

Woman and man worker in quarry on excavation machine looking at a clipboard.
Broker Notes

Buy, hold, sell: Orica, GQG Partners, BHP shares

Let's start the week with some new ratings from the experts

Read more »