UK shares to buy now: why I’m considering this FTSE 250 stock for a 10-year hold

I reckon this quality FTSE 250 business is well-placed to thrive as the world builds back from the coronavirus pandemic.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

There’s no denying the quality of the underlying business of Rotork (LSE: ROR). The FTSE 250 company makes industrial actuators and flow control devices. And it serves sectors such as oil & gas production, water supply, wastewater management, power, chemical, mining, pharmaceuticals, manufacturing and others.

I reckon the business is well-placed to thrive as the world builds back from the coronavirus pandemic. And today’s full-year results report demonstrates the business navigated the difficulties of 2020 well.

Why I think Rotork is a UK share to buy now

One of the key indicators, for me, is what the directors did about shareholder dividends. And the news is good. After first postponing payments when the pandemic first hit, they declared today the total payment for the year will go ahead. And it’s 1.6% is higher than the prior year.

Although revenue in 2020 came in down 7.4% and adjusted earnings per share slipped by 3.1%, Rotork has a “highly cash generative business.” There’s a multi-year record of generally rising free cash flow. And the balance sheet looks robust with its modest net cash position.

And I like the firm’s other quality indicators, such as the return on capital and the operating margin, both running just below 20%. However, the company’s attractions have been acknowledged by the market and the shares come with a full-looking price tag.

The stock looks buoyant today on the news of these results. And with the share price near 372p, the forward-looking earnings multiple for 2021 is a little under 30. However, City analysts expect a modest advance in earnings just above 5% for that year.

Chairman Martin Lamb explained in the report the outlook for the company’s end markets is improving. Although there’s still uncertainty regarding the future course of the pandemic, Rotork’s production facilities are operating “largely” as normal. And I reckon the relative strength of today’s figures shows the firm traded well last year through the lockdowns.

A solid order book

Looking ahead, Lamb also said the order book is “solid”. As reasons to be optimistic about the outlook, he pointed to the “considerable flexibility” provided by the strong balance sheet. He thinks the recent reinvestments into the business have strengthened it and placed it well to benefit from recovering demand.

The company’s goal, he said, is to deliver “sustainable” mid-to-high single-digit percentage revenue growth over time. On top of that, the firm is targeting an adjusted operating margin in the “mid-20s”.

I see Rotork as a potential long-term quality investment that I’d aim to hold for at least 10 years. But it’s worth noting the business has endured volatile periods in the past. For example, around 2014/15 earnings and the share price dipped. And the stock has only just risen above a trading range and consolidation of some eight years in duration.

Nevertheless, I’m tempted by the resilience of the underlying business. And I’d aim to buy some shares on dips and down-days to hold for the long-haul. However, I’m not expecting fireworks ahead. And the high valuation could bite me if earnings fail to grow as expected.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Rotork. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 UK dividend stocks with yields over 10%

These dividend stocks are the highest yielders on the UK market, says Roland Head. But how safe are these generous…

Read more »

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Here’s the Shell dividend forecast through to 2024

The Shell dividend is still nearly 50% below 2019 levels. Will the oil giant use record profits to rebuild its…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 FTSE 100 stocks I think Warren Buffett might love!

Warren Buffett made his fortune thanks to the success of US shares. But here are three FTSE 100 stocks I…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Down 75%, has the Deliveroo share price bottomed?

The last 12 months have been torrid for the Deliveroo share price. But does this open an opportunity to grab…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Is now FINALLY the time to buy Lloyds shares?

Lloyds shares have leapt in value as market confidence has improved. Should I buy the FTSE 100 bank before it…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

3 high-dividend FTSE 250 stocks to buy right now!

The London Stock Market is packed with top high-dividend stocks to buy. Here are a handful I'm considering buying, despite…

Read more »

Woman using laptop and working from home
Investing Articles

How I’m using my Stocks and Shares ISA to generate lifelong passive income

I’m looking to build a portfolio of assets that will pay me an income in my retirement. Here’s how I’m…

Read more »