At the end of every month, I begin to review my holdings and look for potential opportunities ahead. One FTSE 100 stock that has caught my eye is Rentokil (LSE:RTO). Let’s take a closer look at whether I should buy or avoid the shares.
As an introduction, Rentokil is an international business services company. It’s best known as a pest control business, which is still part of its service. In addition, it offers hygiene services, facilities management, and more. With a workforce of over 40,000, it has a presence in more than 70 countries.
So what’s happening with Rentokil shares currently? Well, as I write, they’re trading for 485p. At this time last year, the stock was trading for 564p. This equates to a 14% decline over a 12-month period.
A FTSE 100 stock with risks to note
Due to current economic volatility caused by soaring inflation, Rentokil could see its performance and level of returns suffer. First off, rising costs could put pressure on profit margins. Next, the supply chain crisis may negatively affect its ability to carry out day-to-day operations.
One thing I like about Rentokil and its growth journey to date is its appetite for acquisitions. The risk involved with regular acquisitions is that businesses can often overpay. As well as this, there is always the chance that the new business may not integrate or work well with the existing one. Offloading it could then be costly and harm the balance sheet as well as investor sentiment and returns.
The investment case and my verdict
So let’s look at some positives of Rentokil shares. Firstly, I’m buoyed by Rentokil’s dominant position in a thriving growth market. Its services are essential, and are only increasing in demand. I refer to its pest control and hygiene divisions specifically here. The pandemic shone a new light on the requirement for such services. Based on its brand power and presence, I think it should be able to continue growing to boost performance and returns.
Next, Rentokil has a good track record of performance. I am conscious that past performance is no guarantee of the future. However, looking back, I can see it has grown revenue and profit for the past four years consecutively.
The final positive for Rentokil is that it would boost my passive income stream through dividends. The current dividend yield stands at 1.5%. This is less than the FTSE 100 average of 3%-4%, but I would expect this to grow in time as the business does. I am aware that dividends are never guaranteed, however.
To summarise, I like Rentokil as a business, and as a stock to boost my holdings. It is impossible for me to purchase every stock I like, but I would be willing to add Rentokil shares to my holdings for growth and returns.
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Jabran Khan 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.