Today marks the start of a new financial year. And there’s a FTSE 250 stock that’s top of my shopping list at the moment.
I have a new ISA contribution limit that lets me invest £20,000 without worrying about taxes on capital gains or dividends. And there’s a stock I wouldn’t mind using the whole allocation on!
But first…
Before going any further, it’s worth pointing out a couple of things. First, I don’t plan on investing 100% of my ISA allocation into a single stock, no matter how impressive I think it is.
Second, investing my entire allowance is not the same as investing 100% of my net worth. Concentrating on one stock this year would still leave me with a diversified portfolio overall.
Nonetheless, there’s that stock I really like. If the stock market closed and this was the only share I could buy, I’d do so, and feel OK about things.
Diploma
The stock is Diploma (LSE:DPLM) and it’s been one of the better performers in the FTSE 250 over the last five years. Since 2018, the company’s share price has increased by around 140%.
Diploma is a distributor of specialised industrial components. More specifically, it’s a collection of smaller businesses focused on this industry.
At a price-to-earnings (P/E) ratio of 37, the stock doesn’t look cheap. And It isn’t. So the high price tag brings risk – but I still think the underlying business makes it one of the best UK stocks to own.
In my view, the company has terrific growth prospects, a strong competitive position, and attractive economics. This is why I own the stock and plan on continuing to buy it.
Growth
Diploma’s approach involves acquiring businesses and helping them to operate more effectively using its scale, infrastructure and expertise. This gives it two kinds of growth prospects.
First, there’s inorganic growth, gained from buying other businesses and their future earnings. Second, there’s organic growth, as the amount of income these businesses generate goes up.
The prospects for both look good to me. On the inorganic side, Diploma just closed one deal, has 50 more currently being processed, and another 2,000 identified for the future.
Organic growth also looks impressive. At its last earnings update, the company reported 10% organic earnings growth, which I think is good in a rising interest rate environment.
Economics
As a distributor, Diploma doesn’t have much in the way of property, plant and equipment. This gives it low operating costs, making it cheap to run.
Last year, the company earned £144.3m in operating income using £49.6m in fixed assets. And its capital requirements were less than 9% of the cash generated through its operations.
Those are attractive numbers, so it’s natural to wonder what stops anyone else doing the same thing. More specifically, what stops a company like Amazon disrupting Diploma’s business?
The answer is that the FTSE 250 company is more than just a distributor. It also provides its clients with specialist knowledge, expertise and a bespoke customer service, which is hard to replicate.
As a result, I expect Diploma to resist disruption in the future. And with its growth prospects, I’d feel ok about investing 100% of my ISA allowance for this year into the stock, if it came down to it.
Please note that tax treatment depends on the individual circumstances of each individual and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
