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DCC plc: 30-Year Anniversary

By June 15, 2024June 28th, 2024featured articles, Uncategorized

DCC plc, a business services group originally listed on ISEQ (Irish Stock Exchange) but now a member of the UK FTSE 100 Index, was 30 years listed on the stock market last month.

A £1,000 investment in DCC shares at listing in May 1994 would be worth just north of £60,000 today if dividends had been reinvested in additional shares, representing a return of 13.9% compound per annum.

That record of growth is on a par with Berkshire Hathaway over this same period and miles ahead of the 8.8% compound per annum return from global equity markets. And perhaps just a half dozen European companies can equal DCC’s 30-year growth record.

DCC’s origins were as a venture capital/private equity investor in the late 1970s and into the 1980s (hence the name ‘DCC’ – Development Capital Corporation). DCC started taking controlling positions in its underlying investee companies and it listed as a collection of such companies with several significant minority interests. Over the subsequent 5-odd years, DCC bought out most of these minority shareholdings.

Today, DCC plc is a £5.5 billion ($7.0 billion) diversified business support services group operating in Ireland, the UK, continental Europe, the US and Asia. It operates across three divisions: Energy (LPG distribution, transport and heating fuels, renewable energy products, and biofuels); Healthcare (medical devices, pharmaceutical products, outsourced services to health & beauty brand owners); and Technology (a leading distribution partner for global technology and appliance brands).

To explain where DCC’s returns have come from, the first table is hopefully instructive.

From March 1994 to March 2024, DCC has grown its earnings[1] at 10.9% compound per annum. It’s no coincidence, then, that its share price is also up by roughly the same amount – 11.1% compound per annum. In addition, DCC paid shareholders an average annual dividend of 2.9% for a total annual return of 13.9%.

DCC was able to deliver such strong returns for shareholders because it generated an average return on the shareholders’ equity tied up in the business of just over 16% over this 30-year period. And that’s the key to DCC’s success. DCC management bought sound businesses at reasonable values (and sometimes at bargain values) and, in addition, was able to reinvest in these businesses at high rates of return.

The next table puts DCC in context by comparing its track record over this 30-year period to that of the FTSE World Index and the iconic Berkshire Hathaway. Over this same 30-year period, the total returns from the FTSE World Index have been 8.8% compound per annum (i.e. including dividends reinvested).

Berkshire Hathaway delivered a return of 14.0% compound per annum over this same 30-year period. So, DCC ranks up there with the best and miles ahead of the average.

Over the past five years (the 2020s in the table) total returns from DCC have been miniscule. But earnings growth has continued apace, albeit at a lower rate. In other words, the share price has not kept pace with the earnings growth. To be fair, the price-to-earnings ratio at the peak in 2018 was arguably overextended and some contraction may have been due. However, this contraction in the valuation of the group’s shares was significantly overdone, with the shares trading at circa 9 times earnings in late-2022 and early 2023.

Like Berkshire Hathaway and Markel, DCC’s strength is not necessarily the industries in which it operates, but in management’s ability to deliver high returns on the capital that it employs in its businesses. It takes discipline to not overpay for acquisitions and to run its businesses efficiently. It’s a repetitive business model for growth and we can see no reason why DCC can’t continue to grow at high single-digit rates, at least, for a long time to come.

Ben Graham, author of The Intelligent Investor used to talk about Mr. Market, a manic depressive who would turn up one day in a very excited mood and pay handsome prices in the marketplace for companies (shares) only to return sometime later in a black mood and only willing to pay very low prices.

The relevance of this for DCC is that Mr. Market has been in a black mood for some time regarding the price he is willing to pay for DCC’s shares. This black mood is around DCC’s oil and gas distribution businesses and their long-term durability in a low carbon emissions world. In reality, however, DCC is leading the charge in transitioning its customers to renewable energy solutions and without sacrificing, or lowering, returns on capital employed.

Mr. Market’s recent mood appears to have become more optimistic once again and, who knows, he may even start affording DCC a price-to-earnings ratio that properly reflects the group’s excellent growth record and future prospects, as he did in the years leading up to 2018.

In the long-term, however, the key is not Mr. Market. It is the company’s ability to reinvest its cash flows at high rates of return. In May 1994, the market valued DCC’s shares at circa 12 times earnings. They are valued similarly today. In between, the returns to shareholders have simply reflected the level of returns that the business generated off the capital employed in it. A great management success story and on offer at great value, in our view!

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Rory Gillen
Founder, GillenMarkets

15th June 2024

[1] Using adjusted earnings per share