Why I’d consider holding this FTSE 100 growth stock until retirement
When it comes to making money in the markets, some of the best companies to own are the ones that rarely make the headlines, perhaps because the vital services they provide are either too boring or too unpleasant to dwell on.
One such firm that’s done particularly well for loyal holders has been global pest control firm Rentokil Initial(LSE: RTO). Had you purchased the stock three years ago, the value of your capital would have more than doubled by now.
This is not to say that the company still can’t make money for new investors. Today’s trading update was, after all, reassuringly issue-free.
Ongoing revenue moved 11.8% higher in Q3 to £637.4m with just over a third of this being generated organically and the remainder coming from acquisitions.
Revenue from pest control increased 11.4% thanks to good performance in both growth and emerging markets. Decent weather in Europe and the UK did the company’s top line no harm while ongoing revenue also increased by 12.1% in the US. Elsewhere, revenues from the firm’s Hygiene division (Initial) rose by 22% over Q3.
I’d be surprised if this kind of growth trajectory ended any time soon, especially given the number of deals recently sealed. The £5.8bn cap purchased 16 other businesses over the quarter bringing the total number of acquisitions to 39 so far in 2018. With plenty more targets in its sights for Q4, one can only guess at what the final number for the year will be.
After initially climbing in early trading, Rentokil’s share price was flat by mid-morning. This is perhaps to be expected for a company that’s already trading on almost 25 times forecast earnings, reducing to 22 next year assuming earnings estimates are hit and the share price doesn’t budge.
Nevertheless, should you be looking for a steady, reliable growth play to hold for the long term, I continue to believe that it more than fits the bill. And while dividends are still very low — the 4.75p per share expected next year equates to a yield of just 1.5% at the current share price — levels of free cash flow continue to rise, suggesting that the company should continue the trend of double-digit hikes to the payout going forward.
Another winner
Like Rentokil Initial, global metrology and healthcare firm Renishaw(LSE: RSW) has been a great performer, more than doubling in value over the last three years (and that’s after taking into account the recent slide in its share price). Renishaw also revealed an update on trading this morning.
At £154m, total revenue was 7% higher at constant currency in the three months to the end of September compared to the same period last year. Predictably, the metrology division continues to bring in the vast majority of cash (£147.4m) but Renishaw’s healthcare business did manage to grow revenue by 25% to £6.6m, again once foreign exchange fluctuations are accounted for.
While a fall of 9% in adjusted pre-tax profit to £32.6m may explain the initially negative reaction to today’s update, the gradual rise back to positive territory suggests that shareholders are comforted by the company’s belief that it is now “well placed to benefit” from recent investment and management’s ongoing confidence on revenue and profit growth in the current year, despite our forthcoming departure from the EU.
If only the same could be said for other stocks.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Renishaw. 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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