It never ceases to amaze me how here on Hot Copper there can be...

It never ceases to amaze me how here on Hot Copper there can be such a fierce amount of interest in some of the most dubious and speculative companies with no means whatsoever of increasing their intrinsic value, yet a company like Dulux, which has leading market brands, is managed by competent and trustworthy managers and has a demonstrated track record of creating wealth for its owners, appears to have negligible following.

I mean, why would one actively choose to stress and sweat and worry about outcomes that are completely random and overwhelmingly outside of anyone’s control, such whether or not your oil company’s exploration results will be favourable, or whether your mining company’s single asset, coal or nickel project is going to be commissioned successfully, or whether your conceptual biotech company’s trials will prove that stems cells actually work, or whether tapering of Quantitative Easing by the Fed will affect the gold price and therefore the “value” of your gold stock....

....why would someone go through all this anxiety when you can simply own a company like DLX and not have to worry about a thing – indeed, not even have to THINK about the business, expect for maybe twice a year when it reports its results and you get to see how much more profit your company made, and how much more free cash flow it generated, than the previous corresponding period, and therefore how much more you are getting in dividends?


Take DLX, as a classic case in point:

In a year where consumer sentiment was weak, business confidence was poor, the construction industry was flat, and a Federal election was blamed by many industry executives and business managers as the reason for poor performance of their businesses... against this seemingly highly challenging backdrop, let’s have a look at what DLX did in FY13:

Pro Forma figures:

Revenue: +3.9%
EBIT: +7.0%
EPS: +16%
DPS: +27%


And remember that those impressive figures include a meaningful, but unquantified, investment in marketing initiatives in the Australian paints business and also in Selleys/Yates, as well as the integration period of Alesco (which was a 5 out of 10 acquisition, in my book, but that’s a subject for another time) which would have required incurring of expenses, which were taken above the line.


And the cash generating ability of the business is always something to behold, with Operating Cash Flow covering capex by around 5 times.

Despite the following significant cash outgoings during the year:

Acquisition of Alesco = $145m
Alesco Integration costs = $16m
Capital Expenditure = $29m
Dividends = $38m
TOTAL = $228m

Yet NIBD-to-EBITDA went from 1.6x for FY12 to just 1.9x for FY13.

And even more noteworthy, NIBD-EBITDA at the interim stage was 2.3x, so it has fallen by a significant 0.4x in just 6 months.

Even with double-digit growth in DPS over the foreseeable future, NIBD-EBITDA will get back to levels approaching parity by FY16.


In the meantime I will now close DLX’s result announcement on my computer, go make myself a cup of tea, and not think about the stock for another 6 months.

Stress-free investing.


Cam


PS. Interesting, since it was spun out of ORI around 3 years ago, DLX’s share price has risen by almost 120%. By contrast, ORI’s has fallen by 7%