Dull but consistently profitable companies can often be great investments. Today, I’ll touch on one example each from the small-cap world, the mid-cap space and the FTSE 100.

Locking in profits

I first covered self-storage firm Lok n’ Store (LSE: LOK) in April 2018. Since then, its share price has climbed almost 90%. That’s hardly a bad result considering the simplicity of the company’s business model.

As today’s update showed, there’s no shortage of demand for space to store possessions. Trading over the year to the end of July has been “excellent” with occupancy rates bouncing to 85.8%. Back in mid-2020, this was a little under 70%. Revenue also rose 20.9% on the previous year and is “continuing to accelerate“. 

At £225m, LOK is far smaller than its peers Big Yellow and Safestore. However, it’s quietly building a sizeable estate. A pipeline of 13 sites will give the company 38% more space and should provide another boost to earnings. Whether this and recent trading are enough to justify the current valuation is another thing.

LOK trades at 39 times forecast earnings. That’s steep given the lack of barriers to entry in this industry. So, while I’d still buy today (no one knows where share prices will go next), I’d probably wait for the next, inevitable, market wobble before fully investing my capital here.

Rubbish trading

Another example of a company operating in a dry as dust sector that’s nevertheless done well for investors is waste manager Biffa (LSE: BIFF). Its shares are up almost 80% over the past year. 

As at LOK, this momentum looks likely to continue. Trading in the first three months of its new financial year was “well ahead” of even BIFF’s own expectations. Although the outlook is tied to the UK economy, management now thinks adjusted earnings for the full 12 months will come in roughly 10% higher than analysts were predicting.

There are a few near-term headwinds to consider though. The much-publicised shortage of HGV drivers is one. Ongoing issues with Biffa’s supply chain due to Covid-19 could also knock sentiment. 

Then again, the shares still trade on a reasonable valuation of 19 times forecast earnings. As such, I would feel comfortable taking a position today.

Profiting from pests

A final pick of boring but brilliant UK stocks for me to buy is FTSE 100 pest control giant Rentokil Initial (LSE: RTO). The £10bn cap company is a world leader at what it does.

Like the other stocks mentioned, RTO has done well for those owners able to sit on their hands. Those buying back in 2016, for example, will be sitting on a gain of around 150%. Now that its core business is showing signs of rebounding from the pandemic (revenue growth of 18.3% was seen in the first six months of 2021), I suspect the shares could go on setting new highs.

There are still risks, of course. A valuation of 33 times earnings suggests a lot of good news is already priced in. Should the global economic recovery slow, it’s arguably the pricier growth stocks that will be hit the hardest.

Then again, this is far more defensive than the typically glitzy tech play. Again, while I wouldn’t throw everything at the stock today, I regard this solid company as one to drip-feed my money into gradually. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Two firms that feature on my own watchlist are FTSE 100 pest control business Rentokil Initial (LSE: RTO) and FTSE 250 kitchen supplier Howdens Joinery (LSE: HWDN), who both released results to the market today.  

Organic grower

Ongoing revenue at £9bn-cap Rentokil rose 8.6% at constant currency to £2.68bn over 2019. Positively, 4.5% of this was organic (generated internally rather than through acquisitions) and driven by “increasing presence in growth markets, higher levels of customer retention and a strong innovation programme.” Pre-tax profit came in at £338.5m. 

Considering the non-cyclical nature of its business, I consider Rentokil’s outlook to be very positive. Indeed, according to CEO Andy Ransom, “key demographic trends such as urbanisation” should lead to more growth in pest control and hygiene markets across the globe.

Given all this, it’s perhaps no surprise that the company saw fit to hike its final dividend to 3.64p per share. This brings the total payout for the 2019 financial year to 5.15p per share, representing a 15.2% increase on the previous year. While Rentokil’s 1.1% yield remains very low relative to some in the FTSE 100, the fact that it’s regularly increasing its dividends is a very positive sign, in my book.

All told, I remain very interested in acquiring a slice of this company. That said, 32 times forecast earnings does seem quite a high price to pay in such as nervous market. It stays on the watchlist for now.

Another hiker

Like Rentokil, today’s numbers from Howdens were also positive, with group revenue rising 4.8% to £1.58bn and pre-tax profit moving a very solid 9.3% higher to £260.7m. 

Like Rentokil, this is a company with strong growth prospects. Having opened 44 depots in 2019, Howdens believes it can increase its presence in the UK from 732 to 850 depots while also developing its digital platform.

Like Rentokil, Howdens is also a reliable dividend hiker. Today’s final dividend of 9.1p per share brought the total payout to 13p per share — a little over 12% higher than in the 2018 financial year.

What I particularly like about Howdens though, is its financial discipline. The £4bn-cap boasted £267.4m of net cash on its balance sheet at the end of the year — just the sort of thing that would give me confidence if a downturn in the economy is coming.

Whether this happens as a result of the coronavirus is, of course, hard to say. With regard to the outbreak, Howdens said it was “monitoring” its supply chain and had increased stock levels from product it sources from China. It had also taken steps to find alternative sources of supply. This all sounds very prudent to me. 

Again, however, the valuation needs to be considered. Having done so well over the last year, Howden’s stock now trades on almost 19 times earnings. Although nowhere near Rentokil’s valuation, that’s still fairly high, relative to its industry. As such, I’m hoping for a cheaper entry point in the next few months.

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Today, I’m looking at two businesses which, thanks to their line of work, should be able to keep growing whatever the economic weather. The question is whether they’re worth buying at their current prices.

Killer growth

If all investment decisions were based on how exciting or attractive the companies were, Rentokil Initial (LSE: FLTA) would be unlikely to feature on many investors’ watchlists. The FTSE 100 giant is the world leader in pest control — about as far removed as you can get from a sexy tech stock. 

Despite this, Rentokil’s shares have been on a tear over the last 12 months, rising over 45% following some very positive trading. Despite operations in the US being impacted by poor weather during Q2, for example, July’s interim results showed a 4.2% rise in organic revenue — the company’s highest growth rate in H1 for over 10 years. 

The comforting thing about Rentokil’s line of work, of course, is that pests continue to thrive in good times and bad. The fact that it already operates in over 70 countries (and continues to acquire smaller rivals at a fair clip) should also help to mitigate any impact of Brexit. 

As mentioned above, however, adding this company to your holdings won’t be cheap. Rentokil’s shares currently trade on almost 33 times earnings. Even the most bullish market participants would say that’s expensive for any stock, especially as there are plenty of other companies operating in non-cyclical industries available for much less. 

For now, I’d be tempted to see what happens when a third-quarter trading update lands on 17 October. Should a wave of profit-taking follow, the valuation could become a little more attractive.

Dirty profits

Small-cap Filta Group (LSE: FLTA) could also be worth looking at even though, once again, it’s not cheap to buy.

The company specialises in the unglamorous business of removing fat, oil, and grease from commercial kitchens. This month’s interim results, however, were far from unpleasant.

Revenues rocketed 86% to £12.2m over the first six months of 2019 with £4.2m of this coming from its acquisition of peer Watbio. Adjusted pre-tax profit rose a healthy 14% to £1.3m. 

Elsewhere, a forecast yield of 1.5% might generate guffaws from those investing for income, but it’s worth highlighting that the interim dividend was increased by 39% from the previous year to 1p per share. As we never tire of saying at the Fool UK, fast-growing dividends are indicative of healthy businesses and, for this reason, are often preferable to sky-high yields that prove unsustainable. 

Filta is also doing its best to expand in markets other than the UK with “steady growth” in franchise numbers reported in North America and Europe. According to CEO Jason Sayers, the fact that its services are only being used “by 2% or less of the available markets in each geography” gives the company a lot of ‘white space’ to target. Increased regulation relating to hygiene should also act as a tailwind.  

Like Rentokil, Filta’s valuation is high at 37 times forecast earnings. Nevertheless, a price-to-earnings-growth (PEG) ratio of below 1 suggests investors should still get a lot of bang for their buck. 

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Now, though, growth is expected to continue over the long run. As such, now could be a time to buy it at a moment when a number of FTSE 100 shares, including one that reported on Thursday, may be overvalued after the index’s strong start to 2019.

High valuation

The stock in question is support services business Rentokil (LSE: RTO). Its full-year results showed continued improvements in revenue and profitability. Sales increased by 13.2% on an ongoing basis, while ongoing operating profit increased by 13.3% at constant currency. Its strategy of focusing to a greater extent on innovation and digital technology appears to be bearing fruit, while acquisitions have also helped to improve the financial performance of the business.

Looking ahead, the stock is forecast to post a rise in net profit of 10% in the current year. While this would represent a strong performance, its share price appears to fully factor this in. Having risen by 19% in the last year, it trades on a price-to-earnings (P/E) ratio of around 25, which suggests that it lacks a margin of safety.

Therefore, while Rentokil is performing well from a business perspective, its investment appeal appears to be limited. There may be better alternatives in the FTSE 100 which offer growth at a more reasonable price.

Improving prospects

As mentioned, AstraZeneca has returned to growth in recent quarters. In the current year, this trend is due to continue. The company is forecast to record a rise in net profit of around 13%, with it on course to deliver further growth beyond 2019. Further investment in its pipeline is expected to strengthen its competitive position, as well as provide a growth catalyst for its profit and dividends over the medium term.

Despite this, the stock continues to offer good value for money. It trades on a price-to-earnings (P/E) ratio of 20, which could represent value for money given that it has the capacity to provide double-digit earnings growth over the long run. Alongside this, its defensive profile and the long-term tailwind which an ageing population could provide to the wider healthcare industry mean that it is well-placed to generate improving levels of total returns in the coming years.

As such, buying AstraZeneca now could prove to be a shrewd move. It may have been a poor performer from a business perspective in previous years, but a revised strategy is now expected to come good. With a dividend yield of around 3.5% from a shareholder payout that is due to be covered 1.4 times by profit this year, it could prove to be a worthwhile retirement stock.

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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca. 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.

As such, now may be a good time to sell shares that appear to be excessively priced. Here are two prime examples that may offer strong dividend growth, but which lack sufficiently wide margins of safety to merit investment.

Strong performance

Reporting on Thursday was support services company Rentokil (LSE: RTO). The business enjoyed a positive first quarter of the year, with its ongoing revenue increasing by 15.7% at constant exchange rates. Organic revenue growth of 3.2% was up slightly on the previous quarter’s figure of 3.1%. And when weather conditions and the disruption they have caused are excluded from the figure, it remains in line with growth from the comparable period a year ago.

The company’s acquisition programme has continued. During the quarter it made 11 pest control acquisitions in addition to the Cannon Hygiene business acquired in January. Further M&A activity looks set to take place during the remainder of the year, with the business having a strong balance sheet which could facilitate a higher level of acquisition activity.

While Rentokil has been able to increase dividends per share by almost 100% in the last five years, it has a dividend yield of only 1.6%. This suggests that it may be overvalued, while a price-to-earnings growth (PEG) ratio of 2.3 indicates that it fails to offer growth at a reasonable price. Therefore, even though from a business perspective it appears to be performing well, it seems to lack investment appeal at the present time.

High valuation

Also lacking investment potential within the FTSE 100 is wealth manager Hargreaves Lansdown (LSE: HL). The company appears to be overvalued even though it is in the midst of a favourable period when it comes to earnings growth.

Looking ahead, the stock is expected to deliver a rise in its bottom line of 13% in each of the next two financial years. However, it trades on a PEG ratio of 2.5, which suggests that the market has already factored-in its growth outlook. This could lead to poor share price performance – especially with investor confidence having the potential to change rapidly.

While Hargreaves Lansdown is due to raise dividends per share at an annualised rate of 26% over the next two financial years, its forward yield of 2.8% suggests that it still does not offer impressive income prospects when compared to other stocks in the FTSE 100. As such, now could be the right time to sell it after the index has experienced a recovery of sorts in recent trading sessions.

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Rising valuation

Reporting on Tuesday was quality assurance specialist Intertek (LSE: ITRK). Its share price gained over 8% following its first-half results. They showed a rise in revenue of 2.7% at constant exchange rates, while organic revenue growth was even lower at 1.7%. However, with the company’s portfolio strength and cost discipline driving margins up by 110 basis points, its earnings rose by 11.4% on a per share basis.

Looking ahead, it is expected to record a rise in its bottom line of 8% in the current year, followed by further growth of 7% next year. The company seems to have growth potential beyond 2018, with it being well-placed to grasp a growth opportunity from the $250bn global quality assurance industry. However, with its shares trading on a price-to-earnings (P/E) ratio of 25.5, this potential seems to have already been priced in.

In the short run, investor sentiment in the stock appears likely to improve further. The company’s stock price has been buoyed by its update, and an even higher valuation could be possible in the near term. However, in the long run there appear to be better risk/reward opportunities within the FTSE 100. This means it may be the right time to sell Intertek.

Rising valuation

This year has been a positive one for commercial pest control company Rentokil (LSE: RTO). Its shares have increased in value by 30%, with it outperforming the FTSE 100 by 26% since the start of the year. However, this means that it now has a P/E ratio of 24. Even though Rentokil is expected to report an annualised rise in earnings of 10%+ over the next two years, this still seems excessive. In fact, it translates to a price-to-earnings growth (PEG) ratio of around 2.4, which is difficult to justify.

Of course, the company’s strategy appears to be sound and its turnaround in recent years has been impressive. As a business, it seems to be attractive and offers a mix between stability and growth. However, the market seems to have become overly enthused about its outlook. This has resulted in a valuation which suggests a share price fall is more likely than a share price rise in the medium term.

Clearly, with the FTSE 100 trading close to an all-time high, big valuations are not uncommon. However, in the case of Rentokil its current price level appears to bear little resemblance to its outlook for 2017 and 2018. As such, it may be best to avoid it at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Intertek. 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.

By freeing up customers big and small from the costly and time-consuming process of procuring these mundane items, Bunzl has made itself an indispensable partner, which together with expansion into new markets and adding new products has made it a fantastic growth stock.

In the past five years, the company has increased earnings by 50% and with sales growing at a solid clip, margin improvement under way and the potential for expansion into Europe, it is one of my top FTSE 100 growth stocks.

In 2016 the group’s £7.5bn in revenue predominately came from its most mature markets, the US and UK, which together accounted for just under 75% of turnover. With just £1.3bn, or 18%, of sales coming from Continental Europe it’s easy to see why management is targeting this huge, easy-to-access and highly fragmented market for future growth.

Last year constant currency sales from the region rose 10% year-on-year (y/y) while operating margins bumped up from 9.1% to 9.3%. Over the next few years this level of growth is entirely sustainable as the company acquires its way into other countries, adds different capabilities and increases cross-selling. Investors needn’t worry about this strategy going wrong either as management has a long history of success with acquisitions. It has completed 136 purchases since 2004 for a total of £2.4bn.

While Bunzl’s shares appear somewhat pricey at 20.4 times forward earnings, this valuation is in line with historic prices over the past four years and with high growth potential, margins increasing and a great management team, I reckon the stock is one that will reward investors for many years to come.

Macabre growth

Another under-the-radar FTSE 100 growth star on my list is pest control chain Rentokil (LSE: RTO). Earnings growth has been choppy over the past few years for the multinational, but with growth heating up as it targets the US, the world’s largest market, I believe the long-term growth potential for this stock is fantastic.

Thus far, the strategy is paying off as acquisitions and organic growth boosted underlying sales by 10% y/y in constant currency terms in Q1. This continues good progress carried over from last year, when full year sales rose 12.6% y/y.

On top of positive sales growth through organic expansion and acquisitions, it’s also good to see management doubling-down on its core pest control business. The company has announced it will be moving some of its Western European hygiene and workwear businesses into a joint venture that will dramatically reduce net debt levels, accelerate growth and allow management to concentrate on its core competencies.

Renotkil isn’t a bargain basement share at its current valuation of 22.9 times forward earnings. But with plenty of growth prospects in the US and emerging markets and significant room to improve underlying operating margins of 14.4%, I’d definitely take a closer look at the company if its share price were to dip.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Upbeat performance

The company being discussed is support services business Bunzl (LSE: BNZL). It has reported strong performance in 2016, with its revenue rising by 14% on a reported basis, and by 4% on a constant currency basis. Its operating margin increase of 10 basis points meant that adjusted operating profit was able to creep 5% higher at constant exchange rates, while adjusted earnings were 6% higher on a constant currency basis.

Clearly, its acquisition strategy has worked well in 2016. It has a committed acquisition spend of £184m and its track record of integrating newly-acquired companies is highly impressive. Its performance in Continental Europe was strong in 2016, with it delivering revenue growth of 10% at constant exchange rates. This exposure to non-UK markets should mean that Bunzl continues to benefit from weak sterling in 2017 and beyond.

Outlook

While Bunzl has performed well and is a financially sound business, its outlook is somewhat lacklustre. For example, in 2017 it is forecast to record a rise in earnings of 3%, followed by further growth of 4% in 2018. These growth rates are lower than the FTSE 100’s expected growth in the same time period, and mean that the company may struggle to maintain its premium valuation.

The stock currently trades on a price-to-earnings (P/E) ratio of 20.8, which is relatively high when compared to the wider index. It is also higher than its historic average, with Bunzl’s shares having traded on an average rating of 18.6 in the last five years. Even if it meets its forecast in the next two years, a derating of its shares could mean that it underperforms the wider index.

Growth potential

Of course, a high P/E ratio in itself is not necessarily bad news. Provided the company in question can increase its bottom line at a rapid rate, high ratings can be deserved. Within the support services sector, Rentokil (LSE: RTO) trades on a P/E ratio of 21.7, but is forecast to record a rise in its bottom line of 10% this year and 8% the year after. This rate of growth makes it far easier to justify such a high P/E ratio, and means there is upside potential on offer.

Certainly, Bunzl has a more stable track record and a stronger business model than Rentokil. But with the former seemingly overvalued when compared to its historic valuation and to its sector peer, Rentokil seems to be the stronger buy at the present time.

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Sterling performance

The Yorkshire-based chemicals giant posted an encouraging set of interim results earlier this year and further confirmed that it remained on track to meet full-year expectations. Pre-tax profits grew 7% to £145.1m for the first half of the year on higher revenues of £608.7m, compared to £564.5m reported for the same period a year earlier. Croda’s Life Sciences unit put in a particularly good performance with its Performance Technology and Personal Care divisions also performing well as a result of the recent weakness in the value of the pound.

Full-year results should continue to benefit from sterling weakness as 95% of the company’s sales and 80% of production resides outside of the UK. Croda’s shares have enjoyed a strong rally this year particularly after the EU referendum and are trading 23% higher than before the historic vote. This leaves the shares on an expensive-looking earnings multiple of 24 for the current year, well above the normal range for Croda, with a possible market correction looming.

There’s no denying that Croda is a quality company but I would suggest keen investors wait for a dip in the price, and buy on weakness to gain a more favourable valuation.

Wait for it

Another firm riding high at the moment is business services firm Rentokil Initial (LSE: RTO,) with its share price recently climbing to its highest level in 14 years. Although the Rentokil name has always been associated with pest control, there’s a whole lot more to this worldwide company including hygiene services, specialist workwear and textiles, to name but a few. The company’s future looks very bright with strong growth predicted in the coming years, but does this come at too high a price for would-be investors?

In its most recent update last week, the Camberley-based firm reported strong figures for the third quarter of its financial year, helped by an excellent performance at its pest control business, and of course the weaker pound. Total revenue for the three months to the end of September jumped 32% to £578.3m with the company’s large exposure to the US market being helped along by our battered currency. Rentokil’s shares have gained a staggering 56% over the past 12 months, leaving them looking overstretched at 23 times forecast earnings.

Like Croda, Rentokil has lots of appeal but is just too expensive at the moment. Again, I would suggest anyone interested waits for the next pullback before buying.

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Rentokil’s revenue from ongoing operations increased by 16.6% in the third quarter. Of this figure, 3.1% was organic and 13.5% was from acquisitions. Its pest control division delivered an excellent performance and was able to grow organically by 5.9%. Similarly, Rentokil’s hygiene business demonstrated further improvement and grew organically by 3.2%.

As has been the case in recent periods, Rentokil’s performance in emerging and growth markets was particularly strong. Its sales rose by 20.4% in the former and by 26.3% in the latter. This helped to offset a somewhat challenging performance in parts of Europe, with France in particular proving to be a tough market.

During the quarter, Rentokil acquired 13 businesses which included 10 in pest control. All of the acquisitions were in emerging or growth markets and this provides Rentokil with a sound long term growth platform, since demand for support services is likely to increase rapidly in those markets.

Looking ahead, Rentokil is forecast to increase its bottom line by 25% in the current year and by a further 12% next year. Combined with a price-to-earnings (P/E) ratio of 22.5, this puts it on a price-to-earnings growth (PEG) ratio of 1.9. This represents a fair value for the company, given its long-term growth potential in emerging markets.

Furthermore, Rentokil has impressive income potential. It yields only 1.4% at the present time, but pays out less than a third of profit as a dividend. With such strong profit growth potential over the medium-to-long term, Rentokil’s dividends could rise at a rapid rate and could even be ahead of earnings growth in future years. Combined with its diverse business operations and geographical diversity, this makes Rentokil a sound purchase.

Upside potential

However, within the support services space there’s better value for money and higher yields available. For example, G4S (LSE: GFS) is forecast to grow its earnings by 4% this year and by 12% next year. When combined with a P/E ratio of 15.3, this puts it on a PEG ratio of 1.3. While Rentokil is fair value for money, G4S offers significantly greater upside potential over the medium term.

Similarly, G4S has a higher yield than Rentokil. It currently yields 4.1% and while dividends are not as well covered at 1.6 times versus 3.1 for Rentokil, G4S has sufficient headroom to make its dividend outlook relatively secure. Its strong profit growth outlook also means that dividends could grow at a brisk pace.

While both stocks are worth buying for the long term, G4S seems to be the superior buy due to its higher yield and lower valuation.

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