I am looking for the best UK shares to buy that could boost my passive income stream through dividends. One business that has caught my eye recently is Diploma (LSE:DPLM). Should I buy or avoid the shares?
Technical products
As a quick introduction, Diploma is a specialist provider of technical products to a number of sectors. The business is split into three main areas, which are Controls, Seals, and Life Sciences. In Controls, it supplies wiring, connectors, adhesives, and more. In Seals, it sells seals, cylinders, gaskets, and more. Finally in Life Sciences, it offers consumables needed for healthcare and environmental science purposes.
So what’s happening with Diploma shares currently? Well, as I write, they’re trading for 2,412p. At this time last year, the stock was trading for 3,024p, which equates to a 20% decline over a 12-month period. Many UK shares have fallen recently due to macroeconomic pressures.
The bull and bear case
So let’s take a look at some bull and bear aspects of Diploma shares. I’ll start with some positives.
Firstly, I’m buoyed by Diploma’s diverse business model as well as its global profile and presence. By splitting the business into three areas, it is set up to generate revenue from different avenues and sectors through a multitude of products. Furthermore, this diversity offers it a global footprint through all its offerings.
Next, I like the fact that it does not manufacture its own products. In fact, it is more of a value-added reseller. This means it doesn’t have to contend with costly plants or factories and can generate much more cash this way. This is where I believe it can provide consistent and stable returns to potential shareholders.
Finally, I can see Diploma has a good track record of performance growth recently, although I do understand that past performance is no guarantee of the future. Looking back, I can see it has grown revenue and gross profit in three out of the past four years. In 2020, levels dropped slightly due to the pandemic. With performance growing, and the business generating lots of cash, Diploma currently offers a dividend yield of 2%. I am conscious that dividends are never guaranteed, however.
So to the bear case then. One of my biggest concerns for Diploma is that it is currently at the mercy of macroeconomic headwinds. This is because soaring inflation and rising costs could impact its buying price for the products it resells. Rising costs could put pressure on profit margins, which in turn, could affect levels of returns.
Another issue is the current supply chain crisis. Diploma has built a reputation on serving its customers effectively and efficiently. With supply chain constraints, could it lose customers or even experience damage to its brand despite the crisis being out of its control? This is a development I will keep a close eye on.
My verdict
To summarise, Diploma looks like a well-run business with lots of potential to boost my holdings. There are risks to consider but I believe these are shorter term. I’m buoyed by its diverse business model, as well as the fact that the business is cash-rich and has a great balance sheet. I believe this will support growth and boost returns too. For that reason, I would buy Diploma shares.
