The FTSE 100, the UK’s leading blue-chip stock index, is full of business success stories. Some of these are more impressive than others, such as the rise of Rentokil (LSE: RTO).
Rising from the ashes
Rentokil first appeared on my radar back in 2011. At the time, the company was still trying to recover from the financial crisis. A debt-funded acquisition binge before the crisis had left it struggling with over £1bn in debt and £2.1bn of liabilities in total, against only £2bn of assets. In other words, the enterprise had negative shareholder equity and was, therefore, effectively worth less than zero.
However, Rentokil’s most important asset, its strong global franchise, wasn’t reflected on the balance sheet. And, as rodents don’t take time off, Rentokil’s pest control business helped pull the company out of the gutter.
Over the next few years, management worked tirelessly to rebuild the group. In 2017, all the hard work paid off when Rentokil was promoted back into the FTSE 100 (the firm was kicked out just after the crisis). When the group officially returned to the index, CEO Andy Ransom told investors: “We’re back where we belong!“
In my view, Rentokil’s recovery is a testament to the company’s robust business model. It’s one of the world’s leading pest control businesses, a market where reputation counts for everything, and there will always be a demand for its services. As well as leading the market in pest control, the firm is also one of the UK’s leading providers of specialised deep, and industrial cleaning. Once again, this is a business where reputation and scale count for more than having the lowest cost.
Also, at a time when so many industries are being disrupted by new and innovative technologies, I believe Rentokil is one of the few businesses shielded from such changes.
Beating the market
Over the past 10 years, shares in the pest control business have produced an average annual return for investors of just under 17%, turning every £1,000 invested into £5,400. Investors have benefited from both earnings growth and the recovery of the market’s confidence in the business. Indeed, right now shares in the company are changing hands at 25 times forward earnings. In 2012, you could buy the stock for less than 10 times earnings.
I believe it’s worth paying a premium to be part of this growth story. To complement organic growth, management is pursuing the acquisition of smaller businesses in regions where it doesn’t yet have exposure. Last year, 41 new businesses were bolted on to the Rentokil empire.
All in all, considering the company’s existing dominant position in the defensive pest control market, acquisition strategy, and its record of growth (despite the stock’s high valuation), I would be more than happy to buy Rentokil right now. Only adding to the investment case is the firm’s dividend record. The business has delivered eight consecutive years of 10% annual dividend growth. The stocks currently yields 3%.