Rollins

From radio station to rat catcher

What are you really afraid of? What are the things that keep you from getting even a single wink of sleep at night? Of course, that's a very personal question that everyone will answer a bit differently. One person fears an uncertain future, another might worry about their kids. Giving a public speech is actually said to be people's most common fear. In 3rd place is worrying about money, and in 5th place are various kinds of vermin.

Warren Buffett once said that a Dale Carnegie course helped him with public speaking. If you have money worries, you've come to the right place here on the blog anyway. And if you're afraid of vermin like moths, rats, or termites, you'll probably love today's article. That's because Rollins is the absolute number 1 when it comes to pest control.

The history and business model of Rollins Inc.

The history of Rollins Inc. takes us back to 1887, when Otto Orkin was born in Latvia. At age 5, he emigrated with his family to Walnutport (Pennsylvania) to run a farm there. From early on, Otto was responsible for protecting the family's food supplies and livestock from rats. At first he used a shotgun for this, but at age 12 he looked for an easier, more convenient way to get rid of rats for good. He began mixing various substances to make an effective rat poison. At 14, he borrowed 50 cents from his parents, bought large amounts of arsenic with it, and started talking to several pharmacists about the most suitable formula. His first rat poison consisted of a mixture of arsenic, phosphorus, food scraps, and colored flour. The poison worked so well on the family farm that Otto eventually started offering it to his neighbors for free. If they were happy with the results, he billed them for the following deliveries. To grow even further, Otto, who had by now become known as "The Rat Man," went door to door and convinced residents to try his rat poison too, with no obligation. In this way he managed to build a solid customer base in no time.

In 1909, Otto Orkin moved to Richmond (Virginia), a city that didn't yet have an established pest controller. He decided not only to sell his own poison against rats, mice, cockroaches, and other pests, but also to market his exterminator services. Business was so successful that by 1912 he was able to move into his own office in downtown Richmond. Besides pest control in private homes, Otto was by now also taking care of some commercial customers, including hotels, hospitals, and warehouses. When he received his first government contract in 1925, for fighting rats at the Wilson Dam in Alabama, he promptly opened a second office and now also officially founded his company, the Orkin Exterminating Company. From then on, Orkin expanded at a tremendous pace, so that by 1955 he already had 325 locations in 28 states. When Otto turned 74, he and his family thought about the future of Orkin's. And this is where Orville Wayne Rollins comes into play.

He was born in Ringgold in 1912 and also had to help out on the family farm as a child. For a long time he dreamed of going to college to become a lawyer. But when a hailstorm completely destroyed that year's harvest, he had to give up this dream. Instead, he worked in a textile mill for 15 years. When he spent a lot of time in bed with 2 herniated discs, he came up with the idea of buying a radio station to support his brother John's car business. In 1948, the two founded Rollins Broadcasting Inc. and took over several radio stations. Business was going brilliantly and they were able to keep growing. With 6 radio stations and 3 TV channels, Rollins went public in 1961. That year, it also began diversifying its business more broadly. Wayne recognized the great potential of Orkins and, together with a bank and the insurer Prudential, carried out the first leveraged buyout in the US. Little by little, Rollins expanded its position in this segment, so that today it's the world market leader in pest control. With 19 subsidiaries, it serves more than 2.4 million customers, generating annual revenue of over $2.1 billion.

How can Rollins develop in the future?

First, I'd like to take a quick look at the recent figures for Q2 2020 (ended 06/30/2020). In this quarter, Rollins booked revenue of $553.3 million, an increase of 5.6 percent over the prior-year quarter. It achieved net income of $75.4 million - a hefty 17.2 percent increase. If you look at the revenue breakdown, you quickly see that Rollins operates mainly in three segments. 42 percent comes from pest control in private homes. Around 40 percent of revenue is earned with services for commercial customers. And the sale of pest control products contributes just under 18 percent of revenue.

Without a doubt, Rollins' executives will keep looking out for attractive takeover candidates. In this way they'll keep expanding their business and diversifying it even more broadly. Recently, the company announced that it wants to buy the largest independent pest controller in Australia, Adams Pest Control. I think it's great that Rollins is broadening its position outside the US too. Because currently, over 90 percent is still earned in its home country.

Another thing I really like as a private investor is that Rollins is still family-run. Sadly, the longtime chairman and Wayne's son Randall Rollins passed away on August 17, 2020, at the age of 88. Now Randall's brother Gary will take his place and lead the company going forward. Family businesses often stand out because they plan for generations rather than for the best possible next quarterly figures. So just the right thing for long-term investors.

Last but not least, I'd like to touch on the strong growth market of pest control. Rising health awareness in particular is leading more and more people to regularly use pest control services, both privately and commercially. The market is expected to grow from $20.5 billion in 2019 to $27.5 billion by 2025 - the best conditions for Rollins. But it's also a fact that insects and other pests are a problem especially in countries with higher temperatures. So in my opinion, Rollins is welcome to keep expanding there. Either way, nothing should stand in the way of a highly profitable future.

And what about the dividend?

Rollins has shared its profits with shareholders since its IPO in 1961. However, the pest controller hasn't always managed to raise its dividend. For example, it had to cut it slightly in 1998. Since then, though, everything has been going according to plan again, and today Rollins can look back on an annual dividend growth rate of over 14 percent (over the last 10 years). The current dividend yield is only 0.8 percent, but that's also due to the stock's outstanding performance. At 67.7 percent, the payout ratio is already quite high - but Rollins' business model isn't so capital-intensive, so this point can rather be disregarded here.

Conclusion:
It's been a long time since Otto Orkin hunted rats with a shotgun. Back then, he laid the foundation for a truly very lucrative and fast-growing company. Rollins recognized this potential early on and has developed outstandingly ever since. Long-term-oriented investors should definitely take a closer look at this company.