Up 38% in a year, is this UK share still attractively priced?

Christopher Ruane explains some pros and cons he sees in adding a FTSE 100 UK share with strong recent price gains to his portfolio.

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Information services provider RELX (LSE: REL) has been on a great run in the stock market lately. In the past year alone, the UK share has moved up 38%. Over five years, the increase has been 84%.

The business has been doing well – but is the current share price an attractive one at which to add the FTSE 100 share to my portfolio?

Attractive mixture of businesses

I like the investment case for RELX.

Its business spans a number of areas that have customers who want a product and have few or no alternatives. From academic journals to legal information databases, RELX has built a product portfolio that benefits from strong pricing power. That is good for profitability.

Last year, for example, the company turned over £9.1bn and made post-tax profits of £1.8bn. That comes out to a net profit margin of 19.5%.

The business has been able to fund often strong dividend growth thanks to this lucrative model. Last year, for example, the payout per share grew 8% on the back of a 10% increase over the prior year.

Valuation looks hard to justify

Despite that, the current yield is a meagre 1.6%.

The reason for that is simple. A yield reflects how much each share earns annually in dividends – and the current share price. So a rising share price typically pushes down the yield.

That can be offset by a growth in the payout per share. RELX’s dividend per share has been growing handily. But the share price has been growing even faster, as the gain of almost two-fifths in the past year demonstrates.

Such a sharp share price jump has implications for valuation, too.

The price-to-earnings (P/E) ratio for RELX shares now stands at 38. For a mature company in a mostly sedate though profitable business area, that strikes me as too high.

Could this good business be a good investment for me?

It is not just that the company faces risks, such as ongoing challenges in building its exhibition business profitability to pre-pandemic levels and the risk that currency moves could pose to earnings from its heavily international business.

Even setting aside those risks momentarily (though they are real), I think the valuation is difficult to justify.

The P/E ratio is higher than US growth shares like Meta and almost the same as Microsoft. I think the investment case for RELX is strong. But I do not think it has the sorts of long-term business growth prospects of those US tech giants, whose valuations anyway also look costly to me.

If I had bought into RELX at a much lower price I would be happy to hold it for the long term, earning a higher yield than if I bought today.

At the current price, though, this blue-chip UK share looks too expensive to whet my appetite for buying.

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.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Meta Platforms, Microsoft, and RELX. 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.

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