XPS Pensions Group (LSE:XPS) is a new addition to the FTSE 250, having joined the index a couple of months ago. But investors who knew about it in 2019 could have done incredibly well.
Over the last five years, the stock has gone from £1.18 per share to £3.60. And with the company still posting impressive results, there could well be more to come.
What does the company do?
As its name suggests, XPS specialises in pensions consulting. This includes helping companies stay ahead of changes in regulation as well as providing investment advice.
It’s very much the opposite of semiconductor design. But it’s an important industry that requires specialist understanding and the need for this is unlikely to go away any time soon.
Five years ago, £10,000 would have bought me 8,474 shares in the company. At today’s prices, that would have a market value of £30,508.
In that time, revenues have almost doubled, but wider operating margin means profits have grown much faster. So I think this is definitely worth a closer look.
A people business
With consultancy companies, their people are their most important asset. There are advantages to this, but there are also drawbacks.
On the positive side, XPS doesn’t have much in the way of machinery or equipment. That’s a positive – those things need maintenance and repair in ways that people don’t.
The downside is people can go off and set up rival operations in ways that machines can’t. To limit that risk, firms need to keep paying their staff well – but that’s expensive for shareholders.
XPS has been doing this by paying employees using equity. But that has caused the share count to more than double since 2016, diluting the value of each share outstanding by around 56%.
Is it worth it?
Issuing additional shares is how XPS invests in itself, but the big question is whether or not the company gets a good return on that investment. And the recent evidence is encouraging.
Over the last five years, operating profits have increased by 250%, while the share count has grown by 2.5%. The additional profits have clearly been worth the dilution.
Factoring in the increase in the number of shares outstanding, operating profits have grown at almost 15% per year since 2019. By any standards, that’s a strong result.
Investors will want to make sure the increases keep coming – if the growth rate slows, the equation becomes much less attractive. But I think it has been a clear success recently.
A stock to consider buying
The risk of the XPS Pension Group’s staff using their industry knowledge to set up a rival firm can’t be ignored. But the company has strong customer relationships that help limit this.
I think the stock is one investors should consider. If profit growth can keep outpacing the increase in shares outstanding, shareholders should continue to benefit as a result.
This post was originally published on Motley Fool
