ASSA ABLOY

Is a top investment hiding here under lock and key?

You've surely heard of Maslow's hierarchy of needs. In this social-psychological model, the American psychologist Abraham Maslow divided the essential human needs into five hierarchical levels. Only once one level is largely satisfied is a person motivated enough to work on the next one. The first level consists of basic needs like eating, drinking, and sleeping. Once those needs are covered, people turn to their safety needs. They long for stability, order, and security - personally as well as professionally and financially.

Today I'd like to introduce a company that delivers products and solutions to cover exactly this second level of the pyramid. ASSA ABLOY is the world's leading manufacturer of smart, high-quality locking and security systems. Let's see whether our need for dividends can be satisfied here as well.

The history and business model of ASSA ABLOY AB

One of what were probably the first complex locking systems came from Egypt. It was made entirely of wood and had small drop pins built in that could only be lifted and unlocked with a special key. Let's take a little jump in time to the 19th century. The Industrial Revolution triggered a significant urban boom - more and more people were now living in tight quarters. Demand for locking systems rose quickly, and the first factories began mass-producing locks. The challenge was to build in as many variations as possible, so that ideally only one key would fit. This ideal could only be approximated, which is why there were usually about 35,000 variations. In 1865, Linus Yale Jr. developed and patented the cylinder lock that's still used today. He later founded the Yale Lock Manufacturing Company, which, by the way, is part of the ASSA ABLOY group today.

The origins of the Scandinavian locking system pro go back to Frans August Stenman, who was born in 1826 in the Swedish town of Eskilstuna. Frans was a passionate locksmith, which is why, after his apprenticeship, he also decided to take a master craftsman course. At 23, he passed his master's exam by crafting a lock of outstanding quality. Without hesitating for long, Frans wanted to go into business for himself, so he borrowed money, built a small manufacturing plant, and started making his locks with a small team of employees. The young company FAS won awards at many international exhibitions for its high-quality locking systems, which is why it was able to grow and expand steadily. His son Carl August Stenman (born January 28, 1852), on the other hand, had his own plans. At first he also worked in his father's lock factory. To gain more experience, he deliberately sought out other jobs in the metal industry and, after a stint abroad, also passed his master's exam.

In 1881 he bought a local maker of architectural hardware and from then on produced hinges, screws, rails, and other hardware. This company evolved into August Stenman AB, which was renamed ASSA a little later and kept expanding its product range through sensible acquisitions. During the reconstruction period after World War II, ASSA was able to grow enormously - mostly in its locking solutions segment. Now they also started supplying the Swedish carmakers Volvo and SAAB with locks. The boom was followed by several years of heavy losses - a Finnish competitor called Abloy played a major part in that. In 1988, ASSA was finally bought by Securitas AB and fundamentally restructured. The rationalization process soon showed its first successes, and ASSA became profitable again. Now they began deliberately buying up locking system companies - and the original FAS found its way back into the corporate family, too. In 1994, the separation from Securitas finally followed, along with the merger with Abloy. Today, ASSA ABLOY AB is the world's leading provider of access solutions. In total, it manages 190 different brands, holds about 9,000 patents, and employs around 48,000 people in 70 countries.

How could ASSA ABLOY develop in the future?

First, I'd like to take a look at the most recently published numbers (Q2 2021 - ended June 30, 2021). Total revenue for the period from April to June 2021 came to 23.6 billion Swedish kronor (roughly €2.36 billion). That's a revenue increase of 19 percent compared to the prior-year quarter. After all costs, the group was left with a net profit of SEK 3.2 billion - an incredible increase of 129 percent. At this point, though, you should keep in mind the rather tough prior-year comparisons due to the coronavirus pandemic. Earnings per share rose accordingly from SEK 1.26 in Q2 2020 to SEK 2.89 now.

As mentioned in the intro, security ranks right after basic needs as one of humanity's most important desires. If you now think about developing countries and growing populations, security is clearly an ongoing megatrend that can make a lot of money. It's also a fact that, according to surveys, one in three Germans is still afraid of a break-in today - even though break-ins keep declining. In 2020, there were officially "only" 75,023 burglaries in Germany - in 2015 that number was still around 170,000. On the one hand that's because people are at home more (working from home), and on the other hand because houses and apartments are better and better secured.

Connected, smart security systems are also enjoying rising demand among consumers. ASSA ABLOY naturally benefits from this demand - after all, the company also puts a lot of money into developing innovative products. But the ASSA ABLOY group won't grow over the next few years through innovation alone, but also through fitting acquisitions. Since the merger in 1994, the company has pulled off more than 300 acquisitions - that's an average of more than 11 takeovers per year!

What about the dividend?

Because of the shortened fiscal year at the merger into ASSA ABLOY AB, i.e. in 1994, the company decided not to pay a profit share to its shareholders yet. Starting in 1995, the Swedish security group initiated its semi-annual dividend payment, which it has paid every year since. In addition, since 2010 the company has managed to raise its dividend year after year. Looking at the last 10 years, the average dividend growth rate is a solid 11.7 percent. The current dividend yield of 1.5 percent, as well as the payout ratio of 37.1 percent, are definitely nothing to sneeze at.

Conclusion:
No question, it was a long road from the simple bolt lock to biometric access control. Over the years, Sweden's ASSA ABLOY AB positioned itself as the market leader in this segment. All in all, I'm very confident about the company's future - which is why I just recently added a small position to my portfolio.