The two companies I’m looking at today are great examples of how boring-but-essential businesses could help you retire rich.
Over the last five years, these FTSE 100 dividend stocks have both risen by more than 85%. Alongside this they’ve paid a growing stream of cash dividends. Despite this, neither company looks obviously expensive to me today. So in this article I’m going to take a closer look at both and give my verdict on each stock.
Concrete results
Cement giant CRH (LSE: CRH) is one of the world’s largest producers of cement, concrete and other building materials. More than half the group’s profits come from the Americas, with most of the remainder from Europe.
Today’s half-year results suggest that it’s business as usual for this industrial group. Sales rose by 1% to €11,944m during the period, while rising costs and severe winter weather pushed operating profit down by 2.5% to €592m.
What comes next?
Today’s results look to be in line with expectations for the full year to me. But it’s worth noting that the shape of this group is constantly changing. Chief executive Albert Manifold has made extensive use of acquisitions and disposals to try and improve the growth and profitability of this business.
Mr Manifold’s efforts have been fairly successful. Revenue has risen from €17,136m to €25,220m since 2014, a 47% increase. Operating profits have risen from €834m to €2,095m over the same period, lifting the group’s operating margin from 4.8% to 8.2%.
One downside of this acquisitive growth is that net debt is quite high, at €8.1bn, or 2.5 times earnings before interest, tax, depreciation and amortisation (EBITDA). This is the top end of what I’m comfortable with, especially as CRH’s business does carry some cyclical risk.
The shares currently trade on 15 times 2018 forecast earnings, with a prospective yield of 2.4%. Further progress is possible, but at this level I’d rate the stock as a hold.
Packaging profits
I’m more excited by the opportunities presented by cardboard packaging group Mondi (LSE: MNDI). This business has also grown by acquisition but in doing so has become far more profitable than CRH.
Underlying operating profit has risen from €699m in 2013 to €1,018m in 2017. But this growth has also improved the company’s profit margins. Mondi’s operating margin last year was a creditable 13.7%, and the business generated a return on capital employed of 16%, roughly double that of CRH.
Acquiring smaller rivals and consolidating production seems to make sense in the packaging business. The firm’s blue-chip customers operate in sectors such as consumer goods and automotive manufacturing. They require sophisticated, large-scale solutions on tight timescales. Getting bigger is one way to keep costs down.
Still a buy for me
Mondi shares trade on 14 times forecast earnings with a prospective dividend yield of 3%. Although the group could see demand fall in a sustained European recession, I believe its business should be fairly durable, given that long-term demand for packaging seems likely to rise.
At current levels I rate Mondi as a long-term buy for dividend growth. In my view this is a potential buy-and-forget stock for retirement investors.
