“Be greedy only when others are fearful“, says investing legend Warren Buffett. There’s often value in being counterintuitive, especially when it comes to buying shares. Buffett knows this, perhaps better than anyone else.
And it’s with this advice in mind that I took a closer look at the DCC (LSE: DCC) share price, after its two-month-long 20% nosedive. Over this period, two funds marginally reduced their holdings in the sales, marketing and service support group. In addition, Barclays downgraded its advice on DCC stock from ‘overweight’ to ‘equalweight’.
This means Barclays believes the stock’s performance will now be on par with the FTSE 100, rather than beating it. OK, so the bank is not as confident in DCC’s prospects as it was previously, but a performance on par with the Footsie, especially in this economic climate, is a good thing in my view.
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Yet investors are selling the stock anyway. So I think there are now two strong reasons to buy DCC at the current share price.
1. DCC’s shares are cheap
Trading at 5,554p at the time of writing, DCC stock is well below even Barclays’ new price target of 6,900p. Barclays has lowered its guidance from 8,100p, stating that the company’s return on invested capital ratio (ROIC) is gently declining. In other words, the bank believes DCC’s growth to be slowing down.
Indeed, DCC’s reported return on equity (ROE) figures — a less conservative profitability ratio — show this to be the case. However, the company is growing its asset base and has made a number of acquisitions over the last few years. As new businesses are integrated into the firm, I think lower profitability ratios are to be expected until efficiency gains are made and value is added. But at 9.9%, DCC’s ROE is still far higher than the sector average of around 4.8%.
2. Solid fundamentals and a promising future
DCC has enough liquidity on its balance sheet to ride out many consequences of the coronavirus pandemic. In addition, it’s a profitable business, performing better than expected throughout the shutdown.
Yes, it operates in many low-margin sectors with a five-year operating profit margin around 2.5%. But its recent acquisitions should improve its cost advantages and make it harder for smaller competitors to compete. If it can do this, it will improve on its annual earnings growth rate of 13% since 2015. And higher earnings could mean more in dividends.
Notably, DCC has increased its dividend per share 60% over the last five years and has a history of growing its dividend. Currently, the shares are selling with a dividend yield of 2.4%. But there’s cover of 1.75 times, so dividends are well funded even if they may not increase much in the short term.
However, if it continues its past earnings growth and integrates its new acquisitions, I think these shares could become appealing for income investors and may deliver improving future returns.
Investors appear to be fearful of diving in right now. However, I think this is a great time to follow Buffett’s advice and buy cheap DCC shares to maximise the future value of your portfolio.
