Why did this superstar UK income share jump 15% in the past month?

About twice a year, FTSE 100 growth and income share Diploma (LSE: DPLM) springs to my attention. It’s just done it again, and for a positive reason.

The distribution group has a long and proud record of rewarding loyal shareholders. It’s lifted its dividend every year for more than 25 years. And not just by inches. It’s grown at an average compound rate of 13.22% a year for the last 15 years.

That’s only part of the appeal. Diploma’s also delivered serious share price growth. It’s up a modest 12% in the last 12 months but 146% over five years.

It’s jumped 15% in the past month, which is why it’s come to my attention again.

Dividend growth

This is a steady compounder that’s quietly created serious wealth. The total return over the past decade’s a whopping 620%, according to calculations AJ Bell did last year.

Yet there’s another reason why it’s easy to overlook: the relatively modest trailing yield of 1.3%. Its steadily rising share price is partly to blame for that, so investors need to look behind the headline number.

Diploma isn’t a household name, but it also isn’t small. It’s a £6bn operation supplying practical but unexciting bits of kit like seals, gaskets, filters and wiring to customers across North America and Europe. The kind of stuff that makes everything work, without anyone really noticing.

Half-year results published on 20 May showed a 25% rise in adjusted operating profit to £156.9m. Revenue climbed 14% to £728.5m, with organic growth hitting 9%, up from 5% the year before.

Diploma now expects organic growth of 8% for the full year, and an operating margin of 22%. Both figures beat expectations. CEO Johnny Thomson said the group had continued to deliver “compounding growth in good times and bad”.

In today’s uncertain economic climate, that’s a big claim, and a reassuring one.

Price reflects popularity

So why didn’t I buy it back in December? The same reason I hesitate now. Diploma’s shares are expensive. The price-to-earnings ratio is really high at 48. That’s one of the highest on the FTSE 100, at Rolls-Royce levels. Its price-to-book ratio’s close to seven. One is seen as fair value.

Clearly, investors have spotted the quality. But the valuation’s rich. At times like this, I like to wait and see if the market offers a better entry point. There was one a month ago, but I missed it.

The median share price target from analysts is 5,060p, which is around 9.5% above today’s 4,626p. Factor in the dividend and that gives a potential total return of 11%.

Seven out of 12 analysts rate the stock a Strong Buy, while one more says Buy. Only one says Sell. Maybe that lone worrier is scared by Diploma’s P/E too.

Diploma relies on acquisitions to fund its growth. It has a lot of experience, but there’s always an element of risk when bolting on a new purchase. First-half earnings per share jumped 23% to 80.2p. Maintaining that is a tall order, and markets could punish any shortfall given high expectations.

For long-term investors chasing quality and growth rather than a big payday today, I think Diploma is one for the watchlist. If the price settles, or better still dips, I will consider buying. Providing I’m paying attention.

The post Why did this superstar UK income share jump 15% in the past month? appeared first on The Motley Fool UK.

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Harvey Jones has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Aj Bell Plc, Diploma Plc, and Rolls-Royce Plc. 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.