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Croda International(LSE:CRDA) is one of my favorite UK stocks. I think that FTSE 100 a chemical firm is a very high-level business.
Even better, the company's stock price has fallen 26% over the past 12 months. Since the stock is back where it was in 2017, I think it deserves more attention.
Quality performance
In my opinion, Croda has many hallmarks of a high-end business. One of the most obvious indicators is its dividend, which has increased every year for more than three decades.
Croda International dividends per share 2014-24
Created in TradingView
That's usually a sign of a strong business, but it should also be noted that the company only distributes 50 percent of its profits. Some are replanted to grow.
Importantly, Croda has been reinvesting its earnings with impressive rates of return. Over the past decade, the company has consistently achieved strong returns on equity (ROE).
Croda International ROE 2014-24
Created in TradingView
Arguably, this is more important than profit growth. It indicates that the business still has opportunities to grow.
Barriers to entry
Impressive metrics are important. But long-term investment also requires something that is difficult for other companies to compete with, in order to continue to bring strong returns.
In my opinion, Croda's business has the best protection in the FTSE 100. Some of this comes from patents that make it impossible for competitors to replicate.
In some cases, its distribution plans are also specified by drug companies as part of the approval process. That means manufacturers have no choice but to use its products.
This gives Croda significant pricing power. And that's why the business has been able to achieve such strong returns while distributing more to shareholders.
Temporal storms
This is why Croda is one of my favorite UK stocks. The business is also very difficult to disrupt, allowing it to reinvest at a higher rate of return while increasing its profits.
Despite this, the stock is down 61% from its December 2021 levels. This is due to the decline in sales of Covid-19 vaccines, which had given a big boost to both sales and profits at the time.
As a result, Croda's ROE has fallen over the past year or so. And investors need to think carefully about what the company's bottom line will look like when things return to normal.
By 2023, the business generated £149m in free cash flow. That equates to a 2.6% return on a market-cap of £5.6bn, so the current share price suggests future growth expectations.
Should I buy the stock?
Buying shares in high quality companies when they are trading at low prices is what I tend to do with my investing. But I'm not sure Croda fits the bill right now.
In its best year, Croda generated £189m in free cash flow. At today's prices, that means an annual return of 3.3%, which is enough to get me excited about the investment idea.
The benefits are likely to be higher in the future than in the past. But the company will need to do more than it did when demand rose during the crisis.
That seems like a big expectation to me. As a result, even the stock has returned to its 2017 levels, it does not offer the margin of safety I look for in an investment.
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