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When I started buying shares in DCC (LSE:DCC) last year, I had a two-part investment thesis. Neither’s going to plan, so I’m thinking about selling the FTSE 100 stock and moving on.
Even the best investors get things wrong. And as Warren Buffett says, one of the most important things is being able to move on quickly when an investment doesn’t turn out as expected.
The plan
My general view of DCC was that the entire company was worth much more than the sum of its parts. And the firm was looking to sell its healthcare and technology divisions to realise this value.
Analysts estimated these to be worth £2.1bn – over 33% of the firm’s market value. And with its balance sheet in good shape, the cash could be used for dividends or share buybacks.
That would leave the energy unit, which was making just over £500m a year in operating income. More importantly, it was growing at around 9% a year.
All of that sounds pretty good, but things haven’t gone according to plan. The divestitures haven’t – so far, at least – raised the expected cash and growth in the energy business is slowing.
What’s been going on?
DCC announced the sale of its healthcare unit earlier this year. But the £1.1bn sale price was a 15% discount to the £1.3bn analysts had been expecting.
Worse yet, the company’s full-year results for 2024 showed slowing growth in the energy business. And it’s started the year (beginning in April) with a slight year-over-year decline.
The latest news is that DCC’s sold its UK and Ireland distribution business (part of its technology unit) for £100m. Given that it was essentially breaking even, that’s not a bad result.
That leaves the larger part of the technology division still to divest, but unless it achieves a surprising valuation, my overall thesis is going to come up short. So what should I do?
A dilemma
All of this leaves me with a dilemma. I’m a big believer in the benefits of being a long-term investor, but the underlying business looks a lot less attractive than it used to. There’s another £700m on the way via a share buyback, plus whatever the firm can raise by selling its remaining technology operations. The big question is whether or not that’s worth waiting for.
DCC started buying back shares in May, but the stock has fallen 5% since then. So there’s no guarantee a falling share count will cause the stock to rally.
Ultimately though, the biggest question is over the energy unit. The long-term outlook for the stock depends on that part of the company being able to keep growing.
Thesis busted?
DCC’s energy division is on the edge of my circle of competence. I’d hoped the cash raised by divesting the healthcare and technology units would give me enough of a margin of safety. That hasn’t really happened. That’s obviously a disappointment, but that happens in investing.
With a dividend on the way later this week, I haven’t (yet) lost much on this one. I’ve got my eye on some other FTSE 100 stocks, but I might wait and see how the rest of the restructuring goes.
