It's a well-known fact that large-cap tech stocks put up incredible returns over the past decade. But there's a much less discussed stock that has put up a return of nearly 600% of its own, putting it right in line with the 10-year performances of the likes of Apple and Amazon.
This low-key, long-term winner is Chemed (CHE 0.46%). Many investors have never heard of the stock, but it has gained 86% over the past five years and 586% over the past decade. An investor who put $10,000 into Chemed at the beginning of 2013 would have about $58,600 today.
Chemed isn't a tech stock. In fact, it combines a pair of old-school and seemingly disparate businesses: hospice care and plumbing and water cleanup. While this may seem like an odd combination, Chemed makes it work, and after a successful, if unheralded, past 10 years, Chemed continues to look like a strong buy for the decade ahead.
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What is Chemed?
Chemed is the parent company of two subsidiaries, VITAS Healthcare and Roto-Rooter. The company was incorporated as a business unit of W.R. Grace & Co. in 1970, and became an independent company in 1982. Chemed acquires (and divests) different businesses with the goal of maximizing shareholder value.
Since inception, it has made 12 major acquisitions and divestitures. VITAS Healthcare is the largest provider of hospice, or end-of-life, healthcare services in the United States with 48 hospices in 14 states plus Washington D.C. Chemed acquired VITAS Healthcare in 2004.
Roto-Rooter is the leading provider of plumbing, drain cleaning, and other related services in the United States, and it also serves a large part of the Canadian market. Roto-Rooter has been around since 1935, and Chemed acquired the business in 2019.
Recession resistant
One thing I really like about Chemed is the fact that while its two businesses are disparate, what they have in common is that they are both recession-resistant. While it's unpleasant to think about, hospice care and end-of-life care are a necessity, and this isn't something that changes based on the economic environment.
And the need for Roto-Rooter's services, like plumbing and drain services, don't go away just because the economy is slowing. If you have a drain in your house that is backed up, you are still going to call Roto-Rooter (or a competitor) to clear it, regardless of what the CPI is doing or where interest rates are. As such, during the most recent quarter, Chemed was able to raise its guidance for the year ahead, in an uncertain environment where many companies are reducing their guidance or removing it altogether.
Another thing that I like about the Roto-Rooter business is that it is a franchise-based business model. This means that franchisees pay fees to the parent company to open a franchise, and they continually pay recurring royalty fees to the parent company. This helps the parent company maintain an asset-light business model, and it doesn't need to use much of its own capital to expand and open new locations.
A long term value
At 28 times earnings and 24 times forward earnings, I can't say that shares of Chemed are cheap. However, the company has more than doubled earnings before interest, taxes, depreciation and amortization (EBITDA) from $182 million in 2012 to over $400 million over the past 12 months. EPS has nearly quadrupled from $4.72 to $17.46 over the same time frame. As the company continues to grow earnings, the valuation should take care of itself over time.
Chemed is a dividend stock, and while its current yield of just 0.3% isn't going to get income investors' hearts racing, Chemed has continually paid a quarterly dividend for 50 years, since 1973. It has increased its annual dividend payout every year since 2009.
The company is also prolific when it comes to share buybacks. The reduction of its share count thanks to buybacks is why Chemed's EBITDA has doubled over the past 10 years but its earnings per share has nearly quadrupled. This is an example of share buybacks done right. Since 2007, Chemed has repurchased about $2 billion worth of shares, and between dividends and buybacks Chemed has returned approximately $2.5 billion to shareholders over this time frame.
During the most recent quarter Chemed repurchased 50,000 shares of Chemed stock for an average price of $477.68, and the company has another $100 million left in its current buyback program.
Despite gains on par with some of the market's most celebrated stocks over the past decade, Chemed has just kept its head down and continued to grow earnings, which is fine with shareholders. Based on the stock's recession-resistant combination of businesses, long-term growth trajectory, and stellar track record of returns to shareholders, it looks well-poised to continue to be an outperformer for the decade ahead as well.
Chemed is the type of stock that you can feel comfortable about buying and keeping as a a core part of your portfolio for years to come.
