Could this FTSE 100 stock offer a 14% annual return over the next decade?

Strong returns on invested capital make Halma shares an interesting proposition for Stephen Wright. Is the FTSE 100 stock a buy?

| 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.

Engineer Project Manager Talks With Scientist working on Computer

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Halma (LSE:HLMA) has been a top FTSE 100 stock for long time now. A £1,000 investment in the company’s shares 10 years ago would have a market value today of £3,807.

That’s an average return of around 14% per year, not including dividends. This is significantly higher than the average for the FTSE 100, so the question for investors is whether or not it can continue.

Returns on invested capital

According to Charlie Munger (Warren Buffett’s right-hand man at Berkshire Hathaway) whether or not a stock will do well comes down to one thing:

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years, and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you’ll end up with one hell of a result.

Charlie Munger

There’s a lot for investors to take in here. But the central point is that the return from investing in a company’s stock will largely match the returns on invested capital the underlying business generates – regardless of price.

This has certainly been true in the case of Halma. Over the last decade, the company has achieved an average return on invested capital of 14% and its share price has increased by an average of 14% per year.

Halma shares

So the question for investors is whether or not Halma can maintain its high returns on invested capital in the future. If it can, then shareholders can expect more strong returns over the long term.

The company is a conglomerate – a collection of smaller businesses that operate in different industries. That means it attempts to increase its earnings not only by growing its existing subsidiaries, but also by acquiring new ones.

Halma has had terrific success with its acquisitions in the past and this has been an important part of its stellar performance. But acquiring well becomes more difficult as the company gets bigger and this marks the biggest risk with the stock.

With a market cap of £8bn, I think there’s some way to go until the company starts to run into real headwinds here, though. And even if returns on invested capital drop by a couple of percentage points, a 10% or 11% return still looks good to me.

A stock to buy?

Halma’s shares don’t look cheap – at a price-to-earnings (P/E) ratio of 34, they trade at a significant premium to the FTSE 100 average. But Charlie Munger seems to think investors should focus instead on the performance of the underlying business.

The company’s 14% average return on invested capital over the last decade is impressive. And the share price has behaved almost identically over the same period.

I wouldn’t bet against the underlying business managing similar results over the next 10 years. So for investors looking to buy a quality FTSE 100 stock to hold for the long term, I think Halma is worth serious consideration.

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 assessed. Consider taking independent financial advice.

Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has recommended Halma Plc. 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

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »