Relx (LON:REL) is always one of the top performers in the FTSE 100. Its shares are up 17% in 2024 and it’s currently the sixth biggest company in the UK.
But despite being a consistently high performer which rarely lets down its shareholders and pays a healthy dividend along the way, it’s often hard to justify an entry point.
At the time of writing shares are trading on 28 times forecast earnings, which is towards the top end of the recent range, but Relx PE ratio rarely falls below 25x. The free cash flow yield of just over 3% is perhaps slightly more appealing from a valuation perspective, but only just. Relx is definitely not a value stock.
But I am not a value investor. I look for stocks that can provide long term compounding returns and in that respect, Relx definitely ticks a lot of boxes.
The company generates sales from four distinct divisions which all have very sticky customers. In scientific and legal, the company boasts a number of key brands for academic and legal professions. And in risk (the largest and fastest growing business division), customers include many governments and major global corporations. Sales have risen at a compound annual rate of 7% over the last five years, which accelerated to 7% in 2023. The company is forecast to generate annual revenue of over £10bn for the first time in FY2025.
Sticky customers mean gross margins are high. The biggest cost of sales come from running the huge databases. The company also has a decent degree of operating leverage, meaning margins have expanded as sales have risen. Last year operating margins rose to just shy of 29% and have risen further over the prevailing 12 months.
The company is also very good at squeezing profits from its working capital. Return on capital employed (ROCE) has averaged 23% over the last five years and rose to 30% in the last 12 months. Return on equity, which measures the profit generated from every £1 of net assets was 50% last year.
Cash conversion is also excellent. Operating cash inflows tend to exceed operating profits, meaning the company converts every penny of its operating profits into cash. Management doesn’t shy away from spending that cash. Capital expenditure has almost doubled in the last…
