Meet the FTSE 100 stock I’ve been buying this week

Shares in DCC (LSE:DCC) fell 7% in a day earlier this week. And I took the opportunity to add to my existing investment in the FTSE 100 company. 

The business is in an interesting position and its latest news disappointed investors. But while I can see why, I think the lower share price is an opportunity.

What’s the news?

At the moment, DCC consists of three divisions – energy, healthcare, and technology. But its plan for the future is to focus on its energy business and divest the others. 

Earlier this week, the company announced it had agreed to sell its healthcare unit for £1.1bn. This was below the £1.3bn analysts had been hoping for and the stock fell as a result.

The difference might not seem like much, but it’s a 15% discount. And it means a lower return for investors, which is where the excess cash generated by the sale is set to go.

That’s why the stock fell 7% in a day. But despite the recent disappointment, I still think the valuation looks attractive at the moment. 

The equation

The deal’s an interesting one. DCC’s healthcare unit accounts for 15% of the firm’s operating income, but £1.1bn amounts to 23% of the market value of the entire company.

That however, doesn’t factor in DCC’s debt (which isn’t included in the deal). This means the implied price is around 15% of the firm’s enterprise value – in line with the unit’s contribution to operating income.

More importantly, profits at DCC’s healthcare division have been falling, while energy’s been growing. So while it’s 15% of operating income, it’s arguably not the most valuable 15%.

That’s why the stock still looks good value to me – and I’ve been buying it on this basis. But I think there’s also an important insight to be had about the current state of the market. 

The current situation

Investors might think DCC has achieved a disappointing price for its healthcare unit, but it’s not the only recent example of this. Both WH Smith and Dowlais have recently cut underwhelming deals.

Put simply, it doesn’t look like a great time to be selling businesses. In the context of DCC, that might be the biggest risk as the firm looks to divest its technology division. 

The other side of that coin though is that it’s a market for buyers at the moment. Lower prices means less risk and better deals for firms looking to make acquisitions.

Fortunately for me, I already have shares in companies that do this in my portfolio.

Investment returns

DCC’s deal might have fallen short of expectations, but I still like the stock. The firm plans to return the cash from the sale to investors and that could mean a big dividend’s on the way.

Getting up to 23% of the company’s current market value back in cash would take a lot of the long-term risk out of the investment. And that’s why I’ve been buying.

The post Meet the FTSE 100 stock I’ve been buying this week appeared first on The Motley Fool UK.

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• Why I think FTSE 100 dividend shares could build a better second income than the S&P 500
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Stephen Wright has positions in Dcc Plc. 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.

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