Information services provider RELX (LSE: REL) has been on a great run in the stock market lately. In the past year alone, the UK share has moved up 38%. Over five years, the increase has been 84%.
The business has been doing well – but is the current share price an attractive one at which to add the FTSE 100 share to my portfolio?
Attractive mixture of businesses
I like the investment case for RELX.
Its business spans a number of areas that have customers who want a product and have few or no alternatives. From academic journals to legal information databases, RELX has built a product portfolio that benefits from strong pricing power. That is good for profitability.
Last year, for example, the company turned over £9.1bn and made post-tax profits of £1.8bn. That comes out to a net profit margin of 19.5%.
The business has been able to fund often strong dividend growth thanks to this lucrative model. Last year, for example, the payout per share grew 8% on the back of a 10% increase over the prior year.
Valuation looks hard to justify
Despite that, the current yield is a meagre 1.6%.
The reason for that is simple. A yield reflects how much each share earns annually in dividends – and the current share price. So a rising share price typically pushes down the yield.
That can be offset by a growth in the payout per share. RELX’s dividend per share has been growing handily. But the share price has been growing even faster, as the gain of almost two-fifths in the past year demonstrates.
Such a sharp share price jump has implications for valuation, too.
The price-to-earnings (P/E) ratio for RELX shares now stands at 38. For a mature company in a mostly sedate though profitable business area, that strikes me as too high.
Could this good business be a good investment for me?
It is not just that the company faces risks, such as ongoing challenges in building its exhibition business profitability to pre-pandemic levels and the risk that currency moves could pose to earnings from its heavily international business.
Even setting aside those risks momentarily (though they are real), I think the valuation is difficult to justify.
The P/E ratio is higher than US growth shares like Meta and almost the same as Microsoft. I think the investment case for RELX is strong. But I do not think it has the sorts of long-term business growth prospects of those US tech giants, whose valuations anyway also look costly to me.
If I had bought into RELX at a much lower price I would be happy to hold it for the long term, earning a higher yield than if I bought today.
At the current price, though, this blue-chip UK share looks too expensive to whet my appetite for buying.
This post was originally published on Motley Fool
