Macroeconomic volatility has caused havoc with many FTSE 100 shares. Some look like opportunities whereas others I would avoid like the plague.
One stock on the UK’s premier index I believe investors should consider buying is Diploma (LSE: DPLM). Here’s why.
Diploma shares soar as FTSE 100 shares struggle
Diploma may not be a household name and it is one of the newer incumbents of the FTSE 100 after its recent impressive performance. It supplies specialized industrial technical products and services to a number of sectors. It operates in three core segments. These are controls, seals, and life sciences.
As I write, Diploma shares are trading for 2,936p. At this time last year, they were trading for 2,358p, which is a 24% increase over a 12-month period. Over three years, they’re up 32% and over five years, the shares are up 112%. There aren’t many FTSE 100 shares I can identify that have experienced such a positive upward trajectory during that time.
The bull and bear case
I believe Diploma shares have been on a great run in recent years due to the company’s impressive performance. For example, revenue has increased by 46% and 28% respectively in the past two years. In addition to this, it has also recorded gross profit growth. Current full-year results are due soon and I’m eager to take a look and see how the business has fared in the past 12 months.
Diploma’s impressive performance and run is down to organic and acquisition-led growth. I’m a fan of acquisitions, and Diploma has done well choosing the right businesses, at the right time to enhance offering and market presence, on the surface of things. Conversely, this is a risk, as not all acquisitions work out. When they don’t, it can be costly to dispose of an asset which can negatively impact a balance sheet, investor sentiment, and returns. To date, Diploma looks like it is acquiring well.
Moving on to returns, Diploma shares would boost my passive income and currently offers a dividend yield of 1.9%. This is lower than the index average and I must admit there are lots of FTSE 100 shares out there with higher yields. However, I’m more interested in consistent, stable dividends from a business with a good balance sheet, track record of growth, and further growth aspirations. Diploma ticks these boxes but I do understand dividends are never guaranteed.
Finally, another risk of note for Diploma is that its shares are trading close to all-time highs. I understand the concept of buying quality stocks at a fair price, but when a share is reaching highs, there’s always a chance that any issues could cause them to pull back.
Final thoughts
Another bullish trait that I think investors should remember when considering buying the shares is that due to the niche markets Diploma operates in, there’s less potential for competitors to come in and easily disrupt its market position as well as its wide reach.
Diploma has been on a great run recently and there’s no telling where the shares could go from here. Excellent recent performance and what looks like a great strategy have benefited the business, in my opinion.
