Who wouldn’t want to own a company that has outperformed the S&P 500 Index since its initial public offering (IPO) more than a dozen years ago by 43.6% while paying a current dividend yield of 8.1%?
And that company would be Compass Diversified Holdings (NYSE:CODI), one of my favorite stocks that I’ve recommended from near it’s start in my publications from Personal Finance through Lifetime Income Report and now in my Profitable Investing.
Compass Diversified is set up as an American holding company under the Investment Company Act of 1940. As such, it invests and owns private companies inside the investment holding company, which allows it to avoid corporate income tax while distributing profits to its shareholders.
It is not a business development company (BDC), as it is focused not on financing companies, but rather owning all or controlling interests in smaller to midsized companies that are based in North America. This focus is to acquire companies that are in specific industrial products or strongly branded consumer products.
Then it works with management to fine tune their companies to increase revenues and underlying business values. And along the way, it receives ample and rising revenues. And when appropriate, it will sell a company and redeploy the resulting capital on new investments.
Its stable of companies is currently at 10. In the industrial companies’ group — the companies are all in niches where they have a strong market position with customers that rely on their products and services on an ongoing and increasing basis.
CODI Stock and Its Companies
They start with Advanced Circuits. This company builds circuit boards and related products that are done to customer specifications, often on a short-order basis, for projects that are done by research groups in private and academic institutions and industrial companies. The products are not mass-market devices, they are tailored products that face little competition.
Then there is Arnold Magnetic Technologies. Like Advanced Circuits, Arnold Magnetic engineers specific magnets and related products that are used in varied industries with few competitors. It serves industries from energy to medical as well as aircraft and defense products that use the products for highly specific applications providing the company with reliable order flows.
Next is Clean Earth. This company provides environmental cleanup services for many different industries. It provides containment and cleaning services for contaminated soil, waste products and other items that are generated by varied industries from resource companies to construction. And it does so on a very regulated basis with a strong track record of compliance with government oversight.
Sterno has highly visible products for anyone that has eaten a warm meal from the food service industry. The heat and warming products are ubiquitous in restaurants and cafeterias and are well-regarded by its commercial and even consumer customers for safe and reliable services.
Last in the group is Foam Fabricators. This company, as the name implies, makes tailor-made foam packaging that is used by companies to package and protect all sorts of products, from industrial components to consumer products. It has a great track record of providing timely delivered and consistent-quality packaging products.
Consumer brands these days are always under assault by competition. One brand can often be replaced by another with cut-throat competition. That has led to many consumer brand companies running into margin challenges and sales declines. The way around these challenges is to have branded goods that have a firm lock on their customer’s tastes and demands.
One of the best inside Compass Diversified has been Ergo Baby. This company is in the baby transportation product business. It has wearable baby carriers that are relied on by parents and are recommended from parent to parent. In addition, it has renowned strollers that have advanced safety mechanisms, with a strong continued demand from parents and grandparents.
Next is Liberty Safe. Liberty makes safes as its name implies. And while there are many safe manufacturers — Liberty has a specific focus on gun safes. With increasingly wide-reaching regulations, gun safes are becoming a requirement for gun owners around America. And with gun ownership and multiple gun ownership around the nation, Liberty has a firm lock on a reliable and increasing client base.
One of the newer companies inside Compass is 5.11 Tactical. It makes and sells protective gear and outfits that are widely used by outdoor enthusiasts. And armed with its strong brand recognition, police and fire departments continue to order and deploy the company’s products for its first responders around the nation.
Next is another outdoor enthusiast serving company called Velocity Outdoor, which includes the Crossman and other brands of crossbow and other shooting products. Highly regarded in the consumer market, the company also provides components for professional deployment including highly-spec laser sighting devices — all with strong and reliable customer demand.
And last up is the company in a market that has many hyped up for hemp — the other side of the marijuana market. Manitoba Harvest manufactures hemp-based food products that are sold in thousands of natural and health-focuses food stores in Canada and America.
All together these companies inside Compass Diversified continue to ramp up revenue for the holding company with the trailing year seeing gains of 29.8%. Operating margins vary by each of the companies, but together they remain nicely positive and advancing over the past year to a current 4.7% for the overall collection.
Return on the holding company’s capital is healthy at 5.04%. And of course, being an investment holding company, it passes through its profits to shareholders. The dividends are currently running at 36 cents per quarter which equates to a dividend yield of 8.1%.
The shares since the IPO have delivered a return of 257% for an average annual equivalent of 10.78%.
And for this year to date, the shares continue to advance that long-term proven trend with a return of 11.87% — well outperforming the S&P 500 Index so far.
And the great thing about Compass Diversified is that the shares trade at a minor premium to book at 1.47 times, while also trading at a discount to trailing sales by 30% — making them a great bargain right now. It is a great dividend buy with gains to come ideally held in a taxable account given its structure as an investment holding company.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.