As one of the most consistent gainers on the FTSE 100, Compass Group (LSE: CPG), is a value investor’s dream.
Between 2006 and 2019, it closed higher every year and increased dividend payments annually without fail.
Then, in 2020, the Covid pandemic put an end to its winning streak. The stock tumbled 27% that year and the company was forced to cut dividends.
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Recovery was swift though. It reinstated dividends the following year and quickly started climbing again. Today, the stock’s trading around £26 — a 145% increase from its November 2020 low of almost £10. That’s an annualised return of 25% a year!
The dividend yield’s returned an average of 1.5% in that time. Using those averages, a £5,000 investment could have grown to £12,800 today, with dividends reinvested.
Should that type of growth continue, a similar investment today could exceed £50,000 in 10 years. But is that a realistic expectation? I decided to take a closer look.
Strong defensive credentials
As the largest contract food service company in Europe, Compass Group’s the kind of business that enjoys consistent demand. Not only does it serve meals in schools, offices and hospitals but also locations as remote as offshore oil platforms. Since 1941, it’s acquired 35 food service companies worldwide, employing over 500,000 staff.
Basically, if food’s being served, chances are Compass is involved. That alone suggests it’s a fairly reliable investment.
So what’s the catch?
However, Compass is sensitive to economic downturns and inflationary pressures, as witnessed in 2020. Rising food and labour costs combined with potential supply chain disruptions could eat into earnings. What’s more, its global reach makes it vulnerable to currency fluctuations and regulatory changes.
Recently, this affected revenue, leading the firm to stabilise operations by exiting certain markets. These market dynamics may continue to create price volatility, which potential investors should take into consideration.
Solid results
Compass posted solid Q3 2024 results last week, with growth driven by high client retention and new business across key regions — particularly in healthcare and education. This growth helped lift revenue, meeting the company’s forecasts for the year and strengthening its global leadership in food services.
Net income grew to $31.5m compared to a net loss of $3.8m in Q3 2023, with sales up 11.8% to $582.6m.
With earnings forecast to grow, its price-to-earnings (P/E) is expected to drop from 32 to 27. This would bring it more in line with rivals, improving the stock’s value proposition. Future return on equity (ROE) is forecast to be above 30% in three years, which is probably the strongest indicator of the company’s performance.
My verdict
It’s true that some stocks benefitted from measures put in to boost the economy post-Covid. However, Compass’ recent performance isn’t unprecedented. Between 2006 and 2016, it enjoyed similar growth, delivering annualised returns of 17% a year.
Barring another pandemic, I see little reason to suggest it can’t do the same again. It may not turn £5k into £50k in the next decade but it should do fairly well. Does that mean I’m planning to buy the stock? You can bet your Christmas pudding I am!
