A small number of British firms have achieved sustained profitable growth using a combination of organic growth and bolt-on acquisitions, which are then developed much further. Diploma (LSE: DPLM) is a good example. I first recommended Diploma in MoneyWeek in April 2019, when the shares stood at 1,550p. That article pointed out that the share price had risen two-and-a-half times from 608p in autumn 2015 and suggested that there was plenty of potential for further growth.
This duly occurred: the recent share price is 4,140p, so the shares have risen almost threefold in just over five years, or nearly 22% per year with annual dividends on top of that. Diploma is a company in the FTSE 100 index with a market value of around £5.6 billion and 2023 turnover of £1.2 billion. The firm offers plenty of scope for further growth, with revenue up 52% between 2021 and 2023. Its three divisions all aim to achieve market-leading positions in their niches.
Diploma’s three arms are life sciences (comprising 17% of sales), seals (37%) and controls (45%). They all provide products coupled with services. These products and associated services are critical to customers, but of relatively low cost, so they are purchased from clients’ operating rather than capital budgets. Controls includes specialised fasteners (for aerospace, for instance) and adhesives; seals includes components and fittings for pneumatic pumps – both stock and custom-made, and often for mission-critical applications; life sciences includes technology-enabled products for surgery and endoscopy, along with diagnostic equipment for clinical laboratories and food safety testing.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Diploma's acquisitions drive profits
Diploma has a strong mergers-and-acquisitions (M&A) pipeline diversified by sector, size and geography. The firm made six acquisitions worth a total of £284 million in the first half of the year to 31 March 2024. This sum exceeded the total seen in the two full previous financial years. The largest purchase this year was America’s Peerless Aerospace Fasteners for £236 million. It will accelerate organic growth through product and geographical expansion and should add 8% to Diploma’s earnings per share (EPS) in the year after the takeover. The second-biggest acquisition was UK-based Plastics & Rubber Group Holdings (PAR) for £38 million. It will add scale to the seals-and-gaskets activities and deliver an additional 1% of EPS.
Both Peerless and PAR are founder-owned businesses with great records of organic growth and business models that match Diploma’s strategy of building high-quality businesses for sustainable organic growth. Diploma operates a decentralised business model that encourages entrepreneurship and focuses on core, scalable business lines that can be developed with organic growth supplemented by bolt-on acquisitions.
This strategy has driven the company’s profitable growth, with revenue more than doubling to £1.2 billion between 2020 and 2023, operating profit rising by 2.6 times over that period and the dividend climbing from 20.5p to 55.3p a share. Diploma serves a diversified set of growing markets, including clinical diagnostics, electrification, industrial automation, infrastructure, renewables, water management, energy and civil aerospace. This tempers the impact of a slowdown in any one market.
Diploma uses return on adjusted trading capital employed (ROATCE) as a key financial measure, which is more demanding than the usual gauge of profitability, return on capital employed (ROCE). ROATCE is the pre-tax return on total capital – fixed and working plus intangibles and goodwill, including goodwill previously written off against retained earnings. ROATCE, therefore, covers capital spent on acquisitions. Diploma’s average ROATCE for the past five years has been 19%.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Rachel Reeves confirms ‘workaround’ for pensioners facing tax bill on state pensionAs the full new state pension looks set to breach the tax-free personal allowance within years, the government has said anyone on just a state pension won’t have to pay income tax on the payment until the end of this parliament
-
Zoopla: House prices in southern England drop for first time in 18 monthsHouse buyers could benefit from a fall in prices, triggered by a rumoured ‘property tax’ prior to the Budget, as Zoopla revealed lower prices for the first time in 18 months
-
Where to look for Christmas gifts for collectors“Buy now” marketplaces are rich hunting grounds when it comes to buying Christmas gifts for collectors, says Chris Carter
-
No peace dividend in Trump's Ukraine planOpinion An end to fighting in Ukraine will hurt defence shares in the short term, but the boom is likely to continue given US isolationism, says Matthew Lynn
-
Will the internet break – and can we protect it?The internet is a delicate global physical and digital network that can easily be paralysed. Why is that, and what can be done to bolster its defences?
-
Why UK stocks are set to boomOpinion Despite Labour, there is scope for UK stocks to make more gains in the years ahead, says Max King
-
Chen Zhi: the kingpin of a global conspiracyChen Zhi appeared to be a business prodigy investing in everything from real estate to airlines. Prosecutors allege he is the head of something more sinister
-
Canada will be a winner in this new era of deglobalisation and populismGreg Eckel, portfolio manager at Canadian General Investments, selects three Canadian stocks
-
Jim O’Neill on nearly 25 years of the BRICSJim O’Neill, who coined the acronym BRICS in 2001, tells MoneyWeek how the group is progressing
-
Circle sets a new gold standard for cryptocurrenciesCryptocurrencies have existed in a kind of financial Wild West. No longer – they are entering the mainstream, and US-listed Circle is ideally placed to benefit
