This is the second in an occasional series looking back at some of my greatest hits over the years and some of the lessons that can be learnt from them. Today we have had a trading update from PZ Cussons (PZC) the personal and home care business which is mostly known for it soap brands like Imperial Leather which seems OK on the face of it. They reported that they expect profit reported in Sterling to be up 6%, although this would have been +17% without the drag from currencies. I won't go into more detail on the results as I no longer hold it, but you can read the full announcement here.
Meanwhile the rating, while still expensive at nearly 19x and around 2% yield still puts me off somewhat. It was a full rating which exceeded my 2% & 20x selling trigger and a slowdown in growth prospects and dividend growth which led me to sell this one back in 2011 and switch into Reckitt Benckiser (RB.) which was arguably similar but cheaper at the time. This worked out well as since then PZC has gone sideways and Reckitt's is up nicely, although as it is no longer cheaper than PZC and showing signs of struggling to grow so I switched that into something else recently.
So what was the story on PZC and why was it such a big winner for me? On the face of it as such a dull business on a high rating today it seems incredible that it could have produced such a huge return. However, when I bought it back in the late 1990's it was very much an out of favour neglected stock, although it had some of the quality characteristics is has today like good margin and ROCE plus a dividend that rose steadily. It was however languishing in the back waters of what then was called Overseas Traders and was then known as Paterson Zochonis and was seen as something of a colonial throwback with its operations in the Far East and Africa. It also had an antiquated share structure with restricted voting A shares which helped the directors to keep control and ruled out a take over by and large. At the time it also had a substantial investment portfolio and as a result the shares also I seem to remember traded at a discount to NAV or book too.
Over time they continued to invest in and modernise the business utilizing the largely liquid investments they had and they also revamped the share structure. They also made some acquisitions to expand their product range and go more up market in some cases. Eventually as Emerging markets became more popular and this one with its oversea exposure and re named to PZ Cussons started to attract a wider audience. Thus as they continued to deliver good earnings and dividend growth the stock got re-rated from a single digit P/E and big yield to in excess of 20x and a sub 2% yield by the time I sold it as a multiple of my original purchase price having enjoyed a steady flow of sizeable dividends along the way.
Summary & Conclusion
So what are the lessons from this one? Well it shows that going into good value, obscure or unloved / neglected stocks and sectors can pay off well if you can find a good quality Company which can grow and you are prepared to wait for it to be discovered by the market and other investors. It takes quite a lot of discipline to stick with these types of stocks especially when you see people making quick gains in .com rubbish or whatever the latest hot sector turns out to be - I guess it is a bit like the fable of the tortoise and the hare in investment terms. It is also another example of one of those family businesses which Lord John Lee the MP investor has written about and held for years too and still does I believe.
Any way if you enjoyed this post and you didn't see the first part you can check it out here. Otherwise check back tomorrow when I'll have a note on some research which when combined with a value screen might help to identify out of favour / neglected stocks.