DCC plc is the top pick in Europe according to Bloomberg’s latest analysts’ survey. I don’t pay much attention to analysts and I surely don’t trust them, but I hadn’t heard of the company before and became curious. DCC turned out to be a really interesting dividend growth stock case!

DCC Business Summary
With its headquarters in Dublin, DCC operates across five focused divisions: DCC Energy (59% of operating profits), DCC SerCom (IT & Entertainment products) (21%), DCC Healthcare (11%), DCC Environmental (5%) and DCC Food & Beverage (4%). About 85% of DCC’s profits are derived from procurement, sales, marketing and distribution businesses, whereas business support service activities account for the remaining 15%. In total DCC has about 8,000 employees. generating revenues of €6,725.0 million and an operating profit of €192.8 million. The main market is the UK, with 69% of operating profits. 18% come from the Republic of Ireland and 13% from the rest of the world.

The DCC plc share
DCC’s shares are traded on the Irish Stock Exchange and the London Stock Exchange. DCC’s shares are quoted on the official lists of both the Irish Stock Exchange and the UK Listing Authority.

ISIN: IE0002424939
ISE Xetra: DCC plc
Bloomberg: DCC ID, DCC LN
Reuters: DCC.I, DCC.L

The DCC share has performed well since the lows in the beginning of 2009 but still has quite a way left to the highs of early 2007.

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Over the last ten years DCC’s adjusted earnings have increased consistently by 10,6% annually. The average for the last five years is somewhat lower, 9,1%.

The return on capital employed (ROCE) has fallen from 23,7% in 2001 to 18,4% in 2010. Since 2007 the ROCE has improved gradually, so at least the slump is halted. In my view, 18,4% is still a very high figure which I’m quite confident with.

The dividend has increased by an average of 14,4% per year since 2001. Since 2006 the annual dividend growth has been 12,6%. Most importantly, the dividend has been raised every year. Nice!

The stock currently trades at €18,85. For the year 2010 the dividend per share is 67,44 cents. Thus, the stock yields 3,6% at current levels. It is not high, but still above my minimum requirement of 3%.

As always one should not forget to take a look at the dividend payout ratio, where the earnings per share (EPS) and dividend payout are compared. The lower the payout ratio is, the safer the dividend is since there is much room (earnings) for the company to use to maintain the dividend should profits fall.

DCC’s dividend payout ratio indeed looks ensuring. Since 2001, it has always remained below 40%. Maybe that makes since with the high ROCE, although as a dividend investor I kind of favour dividends too. The trend is clearly pointing upwards. That doesn’t worry me since it is still quite low. It may depend on the company having entered a more mature stage with less expansion, or simply that the last few years have been considerably more challenging due to the financial crisis. My guess falls on the latter.

Conclusion

I like DCC’s businesses. The company has nestled itself into the very infrastructure of the economy since it tansports, distributes, collects and provides core, essential products such as energy, garbage, food and healthcare products. Whether electronic products are essential may be up for discussion, but not for much longer. So, I like the sector mix.

The geographical mix is a bit more worrisome for me. Unfortunately Ireland is part of the famous PIGS, and in my view the UK is not very far behind to join that group. Hm… PIGS (Y)UK or PIGSU(C)K?! Whatever the appropiate acronym ought to be, the coming deleveraging and austerity measures in the two countries that stand for 87% of DCC’s profits should put further strain on revenue, ROCE, dividend growth and the payout ratio. I would really like to see DCC increase its geographical mix – a lot.

Apart from that, I like what DCC has performed so far. Decent yield, solid dividend growth while maintaining the payout ratio low. I believe the FTSE (London Stock Exchange) is up for a ride down, just like the S&P500 and the rest of the markets probably are in the intermediate term. If that happens, I will eye DCC very closely for an opportunity to add it to my portfolio.

As I always do with new stocks that I analyze, I have added it to the dividend calendar. DCC is a biannual dividend stock, with payouts in July and December.

Read more about DCC at DCC Investor Relations. What is your opinion?

Disclosure: No position in DCC. Read my disclaimer here.