Why I believe time is running out to buy this FTSE 100 dividend growth stock

When it comes to FTSE 100 dividend stocks, there’s one company that stands head and shoulders above the rest.

Distributor DCC(LSE: DCC) might not be the most exciting business in the index, but over the past decade, its growth has left other companies trailing in the dust.

However, I think time could be running out for investors to buy into this growth story and today, I’m looking at why.

Growth superstar

DCC follows a buy-and-build strategy. Starting small, the business has grown steadily since its founding in 1976, buying up smaller distribution firms in different industries to add to its empire. When bolted on to the larger DCC group, these acquisitions have benefited from economies of scale.

This strategy has helped the company grow earnings per share at a compound annual growth rate (CAGR) of 16% over the past five years. Meanwhile, the group’s per share dividend to investors has grown at a CAGR of 11% since 2013.

Today, the firm unveiled further growth for the six months to the end of September. For the period, adjusted operating profit jumped 15.9% year-on-year, helping boost adjusted earnings per share (EPS) by 12.1% to 107.1p. Off the back of these results, management has hiked DCC’s interim dividend payout by 10%, to just under 45p per share (analysts expect a full-year dividend yield of 2.2%).

And I see no reason why this trend cannot continue. Historically, the company has used a mix of both cash from operations and debt to fund deals. Free cash flow from operations was around £180m for the last financial year (although, according to today’s numbers, operating cash flow doubled in the first half of 2018) and, after stripping out cash, DCC’s balance sheet is still relatively clean, with a net-debt-to-equity ratio of just 39%.

On special offer

I believe DCC is one of the FTSE 100’s best businesses, with a long runway for growth ahead of it.

However, amid the recent market volatility, investors have rushed to dump the stock. Today, it’s trading around 22% (excluding dividends) below its all-time high printed in January. The shares have declined 17% in the past two months alone.

These declines mean that the stock is now trading at a forward P/E of 17.2, that’s compared to the five-year average of 29.5!

In my opinion, Brexit uncertainty, coupled with volatility in global markets, are responsible for this decline. But I reckon it’s only a matter of time before investors return to the stock, pushing the valuation back to the five-year average.

You see, over the past few years, DCC has been expanding aggressively in markets around the world (particularly in the highly-defensive fuel trading and distribution industry), and the company is no longer reliant on the UK. Management plans to continue this global expansion drive, which should soften the blow from any negative Brexit impact.

The bottom line

As DCC pushes ahead with its expansion plans and showcases its global strengths, I think it’s only a matter of time before investors return to the company. So, it looks to me right now that shares in DCC are currently on sale, but it might not be long before the market calls time on the offer.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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