When you're looking for stocks that'll stand the test of time and boost your portfolio's value for many years on end, it's helpful to hitch your trailer to companies that address needs for which there is no substitute.
For instance, when someone's in the hospital and needs surgery, there's absolutely nothing that can stand in for having a super-clean operating room -- and that's where Steris (STE 2.53%) comes in.
Let's explore what makes this stock so great as a long-term holding.
Image source: Getty Images.
Meet the healthcare system's cleaners
As a sterilization business, Steris serves customers in the healthcare sector, with everyone from biomedical research laboratories to hospitals and pharmaceutical companies clamoring for its sterility products and services.
Whether it's equipment for aseptic manufacturing, sterilizing surgical tools as a service, or simply selling alcohol wipes, the company's customers simply can't fulfill their primary objectives without its aid -- and Steris has no direct competitors that operate on the same global scale. Think about how little a healthcare system could do without solutions in place for basic things like keeping medical instruments clean and clearing biohazard waste from common areas.
Though it's only thinly profitable, its margin has grown over the last five years, reaching near 6.5%. In addition, 80% of Steris' revenue is recurring thanks to the constant need for the services and consumable goods that it sells, and its trailing 12-month sales tallied up to more than $4.2 billion. So investors can take a measure of confidence in the stability of revenue, which makes quarter-to-quarter variations much less relevant.
As you might have guessed, there's nothing on the horizon that might disrupt its market. While new sterilization technologies might come along, Steris serves so many niches within the field of healthcare-grade cleanliness that it's practically impossible for any single product to threaten its top line significantly. Plus, as the market's dominant player and with its $359 million in cash, Steris could likely acquire a highly threatening new entrant.
Though there isn't necessarily a rapidly rising demand for what it offers, it does stand to benefit from plodding growth in the healthcare sector over time. For reference, one of management's priorities is to continue to grow its revenue sustainably by up to 9% per year for the long term, with earnings expanding at a slightly faster pace all the while.
Over the last decade, that kind of sustainable growth has been one of Steris' major appeals to investors, as shown in the chart.
STE Revenue (Quarterly) data by YCharts
As you can see, there isn't a lot of change in revenue or expenses as a share of revenue from quarter to quarter, though its earnings per share (EPS) are a bit more volatile. Even the chaos of early 2020 is just a blip, which is just one more reason that this is a rock-solid stock.
It'll pad your wallet too
Because Steris' income is highly stable, it can afford to pay a dividend that currently has a forward yield of 0.7%. Of course, that low yield will never get you rich, but the company also has a long history of raising the payout over time, as the chart shows.
STE Free Cash Flow (Quarterly) data by YCharts
Thus, if you're willing to hold on to your shares for a very long time, you'll get the full benefit of experiencing a larger and larger payment. Management has stated that it will continue to utilize the business' free cash flow (FCF) to keep hiking the dividend, not to mention share repurchases and buying up promising companies.
Given its business model and management's goals, it's fairly safe to say that its dividend isn't going to go anywhere anytime soon, and that's another one of this stock's major positive aspects.
Nothing's perfect
Though Steris is a great company as a result of its recurring revenue and ever-rising dividend, you should still be aware that it isn't a stock for everyone who might be interested in a long-term hold.
Though its return of more than 853% in the last 10 years has smashed the market's total return of around 295%, its low rate of base revenue growth means that it might not always do so in the future, and I certainly wouldn't call it a growth stock.
Plus, if its costs rise and stay consistently high for some reason, perhaps as a result of new competitors starting to contest its market share, it could put the dividend at risk since its profit margin is perpetually thin.
But if you're willing to accept that it's a stable, slow-burning wealth generator rather than a shooting star, Steris is an excellent option to anchor your portfolio's value and generate some cash at the same time.
