Burberry (LSE: BRBY) has a massive following of devoted customers around the world, as well as consumers who are drawn to its luxury fashion offer. There are only a few companies in the world that can claim to have this level of global brand recognition. And I think that, as long as the business can maintain its reputation, it could be a great buy and forget stock.
Buy and forget
Forgetting the power of Burberry brand for a moment, the company itself is a well-run business. Last year the London-based fashion house reported an operating profit margin of 16% and the group’s return on capital employed — a measure of profitability for every £1 invested in the business — hit 27%. The London market average is just 4%.
Unlike so many other businesses which fritter away their profits on pricy acquisitions or expansion, Burberry prefers to hold back its cash. This means the group has a great balance sheet. At the end of its 2019 financial year, the firm reported a net cash balance of £840m, roughly 10% of its current market capitalisation.
Management is returning some of this capital to investors. In its last fiscal year, it returned £330m with dividends and buybacks, and I expect this trend to continue. It’s refreshing to see a blue-chip company with so much cash on the balance sheet when the rest of the world is drowning in debt.
At the time of writing, the stock supports a dividend yield of 2% and City analysts are forecasting a payout increase of 5.6% this year, leaving the stock supporting a yield of 2.1%. That might not seem like much, but remember £840m of cash backs the distribution, enough to support the payout for four years.
The power of the brand
The global reach of the Burberry brand is the primary reason why the firm can achieve such attractive profit margins, and generate so much cash. It is one of the top 10 most valuable luxury brands in the world, up there with the likes of Rolex and Cartier.
As mentioned above, as long as management can maintain the firm’s position in the world of luxury, then Burberry should continue to throw off cash for many years to come. The appointment of a new designer, Riccardo Tisci, in 2018, was part of the firm’s drive to meet this aim, and he’s already had a significant impact on the brand.
Moving Burberry’s style away from the traditional check pattern to a range based on its logo helped push sales up 4% in the first part of its fiscal year.
The bottom line
So overall, I think Burberry has all the hallmarks of a great long-term, buy-and-forget investment. The company has global brand recognition, fat profit margins, a strong balance sheet, and is returning cash to investors. There are only a few other businesses in the FTSE 100 that offer such an attractive mix of quality and income, in my opinion.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Burberry. 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.