Good article.
I've owned Halma in my ISA for 9 years (bought about 6 or 7 weeks after Sep 11 2001 when prices generally were somewhat depressed). I could see myself owning this for decades. I feel it's very well run, nicely decentralised with low risk of a blow-up (debt-aversion is key especially if interest rates should surge) or of overpaying for a mega-acquisition. I feel it's also a good inflation hedge should the monetary stimulus now eventually lead to a few years of hefty inflation/currency devaluation. Its products are essential but a small part of the budget of its end-customers, so it should be able to price accordingly.
With continued growth, a target buy price will be a moving target. A sufficiently high earnings yield / dividend yield (or Free Cash Flow yield) would be something I'd look for.
Given that this is a quality company, a very high yield might not come around often, but I'd expect that for example a dividend yield of around 3.5% could be available within the next five years or so and could be a decent enough buy point, representing something like a 7%+ earnings yield (P/E~14) assuming dividend cover of around 2x is maintained on average (an odd good or bad year may change this briefly, but dividends don't seem to do a bad job of tracking the underlying business growth in this company.
That's the sort of level Warren Buffett might call a "good price for a great company", which he'd rather pay than a "great price for a good company".
Then again, a price around 150p was seen briefly in early 2009, (about 5.1% dividend yield). Such bargains ("very good price for a great company") are just occassionally available to the prepared and very patient intrinsic value investor who demands a big margin of safety before investing. This implies more time out of the market waiting for the "fat pitch" but provides much greater returns and lower chances of loss when investments are finally made. Then again, at the time, bargains were rather widely available.
To me, current prices are too high to give a decent margin of safety but I'd expect the market to throw me a chance of getting in at 3.5% dividend yield or better now and again.
Being the patient type who can hold cash, looking for a bargain entry when markets are unusually depressed, I'd probably have this on my watchlist at around 230p (over 3.7% yield), which may come around rarely. I'd quite expect that entry price to rise at around 5.5% per year (more if inflation kicks in or Halma's growth is higher), so this time in 2011 my buy price could well be about 240p, 2012:255p, 2013:270p, 2014:285p, 2015:300p, subject to adjustment for actual fundamentals.
I think such a price might only come along once or twice in that time, and if it's due to sector-specific concerns I might have more richly valued companies in other sectors to sell so I can buy more Halma.
As I already own Halma, I'd be happy to accumulate the dividends and should the opportunity come to reinvest them in Halma at a "good price" I could quite possibly sustain an internal rate of return (including dividends) a good deal better than the 9-10% very-long-term (30-40 year) annualised I project via Halma at the moment.
There's no need to reinvest in Halma if other things are bigger bargains, but I've made some bad choices with reinvesting some of my dividends in the last decade and would've done far better to sit on the cash and wait for Halma in early 2009 at say 200p (riding it down to 150p and back up), which would've given me a capital gain and really given a compound boost to my dividend stream going forward. 20-20 hindsight, eh!
Companies I owned who seemed in control of their debt turned out to hit problems. Cautious, decentralised and debt-averse; Halma (LSE: HLMA) and Berkshire Hathaway (NYSE: BRKb) have prospered since I've owned them and let me sleep well at night. Neither is particularly cheap nor truly overvalued now, but I've learnt to wait patiently and a good price will come along in the end.
