Can Halma plc's growth by acquisition bag you a million?

Stocks don't often show such impressive price gains as Halma(LSE: HMLA). The safety equipment specialist has seen its shares climb by 38% in the past 12 months, to 1,260p, and by a stunning 175% over five years.

Much of the company's underlying growth has been by acquisition, with the latest announced on Thursday. This time it's Argus Security in Italy, coupled with its UK subsidiary Sterling Safety Systems Limited. Argus makes wireless fire systems, and Sterling distributes them in the UK.

The £21m deal, funded from existing cash and debt facilities, is expected to be immediately earnings enhancing.

One thing that does impress me about Halma is its debt management. At the interim stage at 30 September, net debt stood at £181m, which was down from £237m a year previously -- and it's less than this year's forecast pre-tax profit. Revenue was up 15% too, with adjusted earnings per share up 12%, and the interim dividend was lifted by 7%.

Progressive dividends

Halma's inflation-beating progressive dividend policy is a key attraction, though yields are actually low at only a little over 1%. That's not a big deal if cash is being put into growth by acquisition -- a company building itself up to be a future cash cow is a good thing to own.

But I am somewhat put off by the current valuation of the shares. Earnings growth at around 10% per year is enough to justify a premium rating -- but I see forward P/E multiples of nearly 30 as being a bit over-optimistic.

Halma is a great company, but I'd hold off and hope for better buying opportunities in the coming year or two.

Cash today

One thing that's usually better than cash tomorrow is cash today, and that's what Dunelm Group(LSE: DNLM) has on offer. The homewares retailer, which has just appointed a new chief executive in the person of Nick Wilkinson (who was previously chief executive at Evans Cycles), looks set to provide a dividend yield of around 4% in the current year -- and that would represent a rise of 72% since 2013.

The company has been through a tough patch and its shares haven't really gone anywhere over the past five years -- though what now looks like an overvalued peak in 2013 hasn't helped.

Results for the year to July 2017 were less than sparkling, with underlying pre-tax profit down 15% and earnings per share dropping by a similar proportion. And though there was no special dividend as there was in 2016, the ordinary dividend was hiked by 3.6%.

Tough for retail

But it was a tough year for retailing in general, and I think Dunelm's acquisition of Worldstores came at a good time and will help to cement its market-leading position in the UK. And with net debt at a relatively modest £122m (less than EBITDA), I see Dunelm as being in a very good financial position for the longer term.

In fact, analysts are already predicting a 12% rebound in EPS for the current year, and that puts the shares on a forward P/E of about 14.5. That's close to the FTSE 100 average, and with the firm in a good position to progress further when economic conditions ease, I see a decent upside for Dunelm shares in the medium term

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Alan Oscroft has no position in any stocks mentioned. The Motley Fool UK has recommended Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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