There are only a handful of stocks in the FTSE 350 that have produced annual returns for investors of more than 25% over the past decade. One of these is the industrial group Melrose Industries (LSE: MRO).
This company, which buys struggling industrial businesses is hardly the most exciting enterprise around. However, over the past few decades, the group’s strategy has generated outstanding returns for investors.
The stock has produced a compound annual return of 32.3% over the past 10 years, a total return of 1,540%. That’s enough to turn an initial investment of £1,000 into £15,000. It’s highly likely this trend will continue as Melrose continues to do what it does best.
Buy, build, sell
Melrose was founded to fill in a vital gap in the market. Its founders noticed that quite a lot of industrial businesses are poorly managed with low returns. They set out to change this.
They targeted buying poorly-managed struggling companies, nursing them to health with experience, and then selling them on. The strategy has been hugely successful, as the stock’s returns over the past decade show.
The company’s latest acquisition was industrial conglomerate GKN. But this isn’t the only business in the Melrose stable. It also owns US domestic heating and air conditioning manufacturer Nortek.
Acquired for $2.8bn in 2016, Melrose been working its magic on the business over the past three years. According to recent reports, the group is now looking to sell part of this business for $3bn. This could lock in a sizeable profit for the company’s investors.
The group’s track record seems to suggest it will make a healthy profit on GKN when it comes to selling the business.
In the meantime, it will have $3bn from the sale of Nortek to play with. Melrose often distributes special dividends when it completes a sale so a special dividend could be on the cards. Reinvesting the proceeds is also an option.
Buying for the long term
Considering its track record, Melrose looks to be an excellent long-term investment. The stock is currently dealing at a price-to-earnings ratio of 16, which is about in line with the industrial sector average. It also supports a dividend yield of 2.1%. The distribution is covered 2.7 times by earnings per share, so it looks as if it is secure for the time being.
With this dividend income, investors will be paid to wait for the company to complete its turnaround of GKN. At the same time, a special dividend from the sale of Nortek or the reinvestment profits from the deal could lead to enhanced returns in the next five years or so.
Whatever course management chooses to take, it looks as if shareholders are set for a big payoff over the next decade, just as they have been since 2009.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Melrose. 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.