First of all, I want to say upfront that Dulux is a business that I have always wanted to own (the paint business), but so far I have to keep stopping myself from pulling the trigger.
As we all know, the Dulux paint business is a superb business with a very wide moat. Over the years, many had tried to challenge it and failed spectacularly.
- Nippon Paint
- Valspar/Wattyl
Unfortunately, Dulux is run by a team of professionals who have a different mindsets from a family/founder owners.
Professionally run companies have the tendency to develop what I call corporate bloating. What is corporate bloating? It is the pursue of empire building through the acquisitions of many big and small unrelated businesses.
The purchase of Alesco by DLX a few years ago was a classic example. After all, what does garage door have anything to do with paints? The financial drag caused by Alesco in the following years was proof that the whole idea was not that brilliant. Luckily for DLX, the heritage business of Dulux paint is so powerful that the overall result is still acceptable.
When I thought management had learned from its mistakes, I was proven wrong yet again. In the past two years, DLX had bought these businesses:
- Porter's Paints
- Gliderol garage doors
- Munns lawn care products
- Craig & Rose paint business in UK
Granted the consideration for all of these purchases are relatively small for DLX, but still the distraction from the main game of running the ANZ paint business can not be underestimated.
Although I can't prove it, I am of the opinion that had DLX stayed focused on its ANZ paint business and never made any of these acquisitions, its share price now would be higher.
If I were to run DLX, I would divest all of these non-core businesses, reduce the dividend payout ratio to 50%. And then use the free cash flows to retire any outstanding debts. After all outstanding debts are retired, I would use free cash flows to conduct on market buybacks, a la CSL.
Chances of this happening is very low, therefore chances of me becoming a DLX shareholder any time soon is also low.
It's such a shame that such a superb business is being deworsified by all of these non-core acquisitions.
If only.....
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