Chemicals group Croda (LSE: CRDA) is one of those easy to ignore stocks where the share price just seems to consistently grow over time. In that way, it favours the patient investment approach of someone like successful British investor Nick Train.
Why do the shares do well
In the stock market many people try to chase the next big thing. Investing in companies that promise the world and deliver very little. However I think that buying quality companies at a decent price – an approach which happens to be favoured by Warren Buffett and Train – has a much better chance of being financially rewarding. Croda’s shares, in my opinion, do well because they are not flashy. Investors value and reward the consistency of the group’s earnings and profitability.
Admittedly, like so much else about the company, the dividend doesn’t set pulses racing, as it’s only a little over 1%, but what it does do is offer sustainable growth. Year-on-year the dividend increases, at a time when some other FTSE 100 companies are having to slash their payouts to investors. This deserves a premium because it reflects a company where management makes the right decisions, plans for the long term and the shares provide reliable returns. In 2016, the final dividend was 38p, in 2018 that had increased to 46p, a rise of 21%.
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Beyond the dividend, the company shows consistent if unspectacular growth. Operating profit for the year ended 31 December 2018 increased by 3.1%. During the year, earnings per share rose by 6.3% so this shows there is a solid ability to grow.
Acquiring growth
Croda has a history of smaller bolt-on acquisitions which should help it to keep growing and gain market share. In December 2018, it wrapped up a deal to buy Denmark-based vaccine adjuvant specialist Brenntag Biosector for €72m. Its product is used to increase the effectiveness of vaccines.
Prior to that, it had made deals for Nautilus Biosciences Canada Inc, a technology-rich marine biotechnology company based on Prince Edward Island, and Cutitronics, which has developed a novel digital solution to meet the demands of personal care consumers. These deals all add value to the company, extending its expertise and scientific development so that it can stay ahead of the pack and remain innovative.
The value of boring
Croda benefits from global scale, operating in 38 countries and having four distinctive markets for its products: life sciences, personal care, performance technologies and industrial chemicals. Therefore, it’s not reliant on any one country or customer for its profits and claims to have 17,000 customers, showing just how in-demand its products are.
Between 2007 and 2018 profit before tax rose 403%, while earnings per share rose by 476%. This financial performance underpins the solid growth in the share price, which has seen it outperform the FTSE 100.
With all this in mind, despite the high P/E and low yield, which would usually put me off, I think this steady company has a lot of qualities that mean the share price is likely to keep ticking higher. Hopefully further smart acquisitions can add just a bit more of a boost to the company’s growth.
