Business services

As an introduction, Rentokil is an international business services company. It’s best known as a pest control business, which is still part of its service. In addition, it offers hygiene services, facilities management, and more. With a workforce of over 40,000, it has a presence in more than 70 countries.

So what’s happening with Rentokil shares currently? Well, as I write, they’re trading for 485p. At this time last year, the stock was trading for 564p. This equates to a 14% decline over a 12-month period.

A FTSE 100 stock with risks to note

Due to current economic volatility caused by soaring inflation, Rentokil could see its performance and level of returns suffer. First off, rising costs could put pressure on profit margins. Next, the supply chain crisis may negatively affect its ability to carry out day-to-day operations.

One thing I like about Rentokil and its growth journey to date is its appetite for acquisitions. The risk involved with regular acquisitions is that businesses can often overpay. As well as this, there is always the chance that the new business may not integrate or work well with the existing one. Offloading it could then be costly and harm the balance sheet as well as investor sentiment and returns.

The investment case and my verdict

So let’s look at some positives of Rentokil shares. Firstly, I’m buoyed by Rentokil’s dominant position in a thriving growth market. Its services are essential, and are only increasing in demand. I refer to its pest control and hygiene divisions specifically here. The pandemic shone a new light on the requirement for such services. Based on its brand power and presence, I think it should be able to continue growing to boost performance and returns.

Next, Rentokil has a good track record of performance. I am conscious that past performance is no guarantee of the future. However, looking back, I can see it has grown revenue and profit for the past four years consecutively.

The final positive for Rentokil is that it would boost my passive income stream through dividends. The current dividend yield stands at 1.5%. This is less than the FTSE 100 average of 3%-4%, but I would expect this to grow in time as the business does. I am aware that dividends are never guaranteed, however.

To summarise, I like Rentokil as a business, and as a stock to boost my holdings. It is impossible for me to purchase every stock I like, but I would be willing to add Rentokil shares to my holdings for growth and returns.

Diageo

Due to its simplicity, global reach and bumper portfolio of brands, I reckon premium spirits purveyor Diageo (LSE: DGE) is one of the best companies in the FTSE 100. Notwithstanding this, shares in the company are down 13% year-to-date. Glass half-full, that looks like an opportunity to me.

Will Diageo shoot the lights out when market confidence returns? Probably not. The drawback with defensive stocks like this is that they tend not to jump in price on the way back.

However, I’ve never regarded this lead index beast as one to buy for quick gains. More as one that gradually but confidently builds my wealth over time.

Sure, the price could fall, especially if we get some earnings downgrades as a result of drinkers’ tightening their belts in the face of rising costs. But unless I believe consumers will never return to their favourite tipples (I don’t), this should be nothing more than a temporary blip.

Domino’s Pizza

Also making my list of stocks to buy now is Domino’s Pizza (LSE: DOM). In case you weren’t aware, Domino’s is the UK’s leading pizza brand, boasting over 1,200 restaurants across here and the Republic of Ireland. According to the company, it sold over 105m pizzas last year.

Of course, an easy-to-understand business doesn’t guarantee anything in terms of performance. Like Diageo, Domino’s’ price has lost height in 2022. The rise in the cost of living is likely the biggest contributing factor. Despite recovering slightly in the last couple of months, shares are still down 25%. News that CEO Dominic Paul is off to Premier Inn-owner Whitbread probably isn’t helping sentiment.

Still, at 14 times earnings, I think a lot of negativity looks priced in. In June, the company said it continued to expect full-year earnings per share to be “in line with current market expectations“. A 3.7% dividend yield should make up for the short-term headwinds.

Rentokil Initial

A final ‘simple’ stock I’d be happy to buy today is Rentokil Initial (LSE: RTO). While its line of work isn’t the most pleasant, it strikes me as the sort of company that will rarely see a dip in demand. The £9bn-cap is the world’s leading commercial pest control and hygiene services provider.

Another thing I like about Rentokil is that 90% of its revenues come from outside of the UK. In theory, this would help to reduce some risk in my portfolio by taking the strain off of my more home-focused picks.

The question mark for me here is the valuation. Despite falling 12% in 2022, the shares still change hands at almost 26 times earnings. Although I can’t expect to pay a low price for a very defensive company, there’s a risk other investors will continue selling growth-oriented stocks if the tough economic times continue.

But, naturally, no one knows what happens next. So perhaps drip-feeding my money would be most appropriate here?

Rentokil Initial

It may not be the most attractive sector to operate in, but I continue to like pest control and hygiene firm Rentokil Initial (LSE: RTO). That’s despite its shares falling 7% year-to-date.

That dip looks disappointing at face value. However, some FTSE 100 stocks have fared a lot worse. Moreover, this company has delivered stellar capital gains for investors over the last five years. That’s a far better period of time to gauge performance.

Naturally, Rentokil isn’t devoid of risk. The valuation of 27 times forecast earnings could come back to bite investors if current trading falls below expectations. Even if this weren’t the case, the ongoing rotation into value stocks could drag the RTO share price lower.

So long as I we’re happy to hold for years however, an investment here could prove lucrative. The post-pandemic drive toward keeping property and environments as squeaky clean as possible should prove a lasting tailwind.

Rightmove

Having used the property portal recently, I continue to believe Rightmove (LSE: RMV) is an excellent choice for a growth-focused ISA portfolio. The fact that I didn’t even contemplate looking elsewhere is evidence to me that this FTSE 100 company continues to have a dominant hold in its industry. Throw in its extraordinarily high operating margins and returns on capital and the investment case here looks as strong as the UK property market.

Of course, there’s always the potential for the latter to slide into reverse gear, especially given the galloping rise in the cost of living. Such a scenario could see the Rightmove share price tumble by association.

Still, a near-17% fall in the stock since the beginning of 2022 suggests some of this is already being priced in. Even if there is further selling pressure ahead, I’d use this as an opportunity to load up rather than steer clear.

As quality growth stocks go, Rightmove is hard to beat.

Halma

A final FTSE 100 stock I’d consider buying with my brand spanking new ISA allowance would be health & safety tech firm Halma (LSE: HLMA). I’ve banged on about this company for a few months now for the simple reason that I think the market mayhem in 2022 is giving me a great buying opportunity.

[fool-stock-chart ticker=LSE:RMV]

Like Rentokil, I actually think the £10bn-cap is a great defensive pick. The need to provide greater protection for workers is a boon for the company and one that, thanks to increased regulation, looks very sustainable.

One of my few ‘issues’ with Halma however, is the valuation. A P/E of 36 for FY23 is very rich. As such, I’d probably be inclined to buy in installments rather than all in one go. No one knows where the share price will go next, but this makes the process psychologically easier.

Owning a slice of Halma on top of Rentokil and Rightmove also adds a healthy dollop of diversification to my portfolio.

Rentokil Initial’s strong results

Both stocks fell after they released results. So I need to try to figure out whether they indeed deserved the hammering they just took or if it just happens to be a temporary market overreaction that could balance itself out over time. First, let us look at Rentokil Initial. Frankly, there was little to dislike in its results, I feel. Its revenues were up by 5.5% in 2021 compared to the year before, its pre-tax profit was up a huge 41.5% and its dividends rose too. It also has a positive outlook for 2022. 

Among the best UK shares or not?

It is pricey, though. Considering the latest earnings numbers, its price-to-earnings ratio is 35 times, compared to around 16 times for the FTSE 100 overall. From what I can see, there seems to be a rotation away from UK shares that performed quite well during the pandemic. It has been going on for a while, and it continues even now. The company’s share price has already ‘corrected’ quite a bit over the past year, offering almost no gains to investors. I still think that it is a buy for the long term, but also that if its price can dip more, it would be a better idea to buy it then. If I had not already bought it, I would watch it for now and buy on the dip. 

Just Eat Takeaway’s increasing revenues

Next, Just Eat Takeaway saw a brutal drop in its share price of almost 13% yesterday after releasing its 2021 results. On the face of it, the numbers here also looked good. Revenue was up by 33% from the year before. And while it is still loss-making, according to CEO Jitse Groen, it is “now rapidly progressing towards profitability”.

Why is its share price falling?

Yet the company’s share price has been tumbling fast. Over the past year, it has lost over half its value. But it was falling even before that, since the stock market rally started as the first vaccines were developed. And that is quite a while. Also, investors are probably questioning whether its acquisition of US-based Grubhub can really reap dividends. North America is its slowest-growing market right now, though to be fair, it is also the biggest. 

What I’d do

I have long liked Just Eat Takeaway. Much like Rentokil Initial, I do not think it a falling knife. Quite the contrary. I expect its share price to start rising as soon as the first profits start trickling in. And from the looks of it, that could be soon. But until such time, its share price could drop more. I would be happy to buy it but at lower levels than today. In the meantime, I am focusing on these FTSE 100 shares. 

A gold mine of dividend yields

Earlier this year I wrote about how I am bullish on Rio Tinto (LSE: RIO). What I could not have anticipated at the time was that inflation would take off. Why is this relevant? Because high dividend-paying stocks have traditionally helped investors outpace inflation. For Rio Tinto, as of today, that dividend yield sits at an irresistible 10.12%.

As I said in my previous article, I think Rio is an excellent business. It has a great spread across minerals, which means that the cyclical nature of commodities often affects it less than industry rivals. Rio’s main risk right now is the volatility of iron ore prices. The industry is disproportionately tied to Chinese markets, which have seen several government-imposed restrictions this year and shifted prices. Rio is down 12% this year but I believe it can make a comeback in 2022. Its price-to-earnings is a dirt-cheap 5.65, which makes it a total win in my opinion.

A high-growth dividend stock

Over the past five years, Liontrust Asset Management (LSE: LIO) has simply been the gift that has kept on giving. Rarely do FTSE dividend stocks do so well over a long period of time. My concern here would be that Liontrust’s funds consist mainly of equities. The world’s equities markets have performed exceptionally well in recent years, fuelled in part by central bank interventions. However, what goes up must come down and if the crash that many are predicting materialises, that exposure to equities may come back to bite them. Fortunately for Liontrust, it is very well diversified across industries and markets, with exposure to bonds and other assets. I like that investors are pouring more and more cash into its funds and this could mean continued growth into 2022 and beyond.

The world’s largest bug slayer

With its acquisition of American rival Terminix this month, Rentokil (LSE: RTO) has become the world’s big cat (since, you know, cats catch mice) in the pest-control game. Globally, the industry is worth $22bn and is growing rapidly. This is especially the case in light of the pandemic, which seems to have made all of us a little more germ-conscious. A few weeks ago when the news broke that Rentokil was buying Terminix, the stock nose-dived 12% in a single day. I predicted that it would make a strong return and it is up 9% over the past week. Caution must be had as it remains to be seen whether competition authorities in the US will challenge the union of Rentokil and Terminix, but on the whole, I remain bullish on the long-term prospects here.

An insurance giant

After years of underperformance, Aviva (LSE: AV) seems to have been reinvigorated over the past year, under the management of Amanda Blanc. This has resulted in the Aviva share price climbing 24% over the past year, outperforming other FTSE 100 stocks.

I’m also optimistic for 2022. In fact, after it sold several non-core divisions, including its Polish, Italian, and Vietnamese operations, the company has a ton of excess cash. It has pledged to return at least £4bn to shareholders, through both dividends and a share buyback programme. Recently, it also increased its ordinary buyback programme from £750m to £1bn. This seems like a sign of things to come, as further capital return and dividend plans are expected after the full-year results in March 2022. This is likely to include a special dividend.

After selling its non-core units, Aviva seems to have focused on its core businesses in both the UK and Canada. So far, this is proving successful, especially as in the first half of the year, adjusted operating profits from continuing operations rose 17% to £725m. It is also on track to achieve £300m of cost savings by 2022.

The main risk is that the UK economy, to which Aviva is strongly connected, starts to decline. This is especially worrying due to the rise of Omicron. But despite this risk, Aviva’s business seems strong, and I think 2022 could be a very good year. I may buy more Aviva shares before then.

An overpriced FTSE 100 stock

Rentokil (LSE: RTO) has established itself as the global leader of pest control. This has partly been due to the company’s strategy of acquisitions, as it has made 228 since 2016. Recently, it has continued this strategy, announcing an acquisition of its American rival, Terminix, for $6.7bn. But while another acquisition may be a sign of optimism, shareholders seem more worried, with the FTSE 100 stock falling over 12% on the day it was announced (although they are up almost 11% year-on-year as I write). I also have my worries about this acquisition. For one, the company is paying a 47% premium for it, which seems very expensive. Secondly, it may attract the attention of antitrust regulators in the US, which could cause further difficulties. I also worry that it demonstrates the firm’s lack of organic growth. Instead, it seems to have become reliant on acquisitions.

There are some reasons to buy Rentokil, however. For one, this acquisition is expected to lead to around £113m in cost savings three years after the deal has been completed. Further, Rentokil has experienced strong growth recently, and in Q3, excluding its disinfectant services, revenue grew 14%. But with a price-to-earnings ratio of around 40, this growth is not enough for me to buy. Therefore, this is a FTSE 100 stock I’m avoiding in 2022.

There are two significant themes driving growth at the pest control specialist. And it is highly unlikely these will come to an end anytime soon, suggesting the outlook for the group is only going to improve. 

Three tailwinds 

The first theme is global warming. According to various studies, rodent populations are growing as the world heats up. Scientists believe they are thriving and breeding more in warmer environments. 

As well as this trend, in densely populated centres such as London, rodents are thriving on human leftovers. Neither of these trends has an immediate solution, suggesting their populations worldwide will only grow as we advance. 

For companies like Rentokil, this presents a tremendous opportunity. The business has the edge over competitors in the sector because it is one of the world’s largest and most recognised pest control businesses. And its recently-announced deal to acquire US peer Terminix for £5.1bn will only reinforce this advantage. 

This is one of the most significant acquisitions in the company’s history, but we can assume it will not be the last. The global pest control market is incredibly fragmented. Thousands of smaller operators, typically owned by a family-run business or small independant operator, dominate the sector. 

This fragmentation provides scope for further consolidation in the years ahead. In fact, I think this is a third tailwind that can help drive the company’s growth over the next five to 10 years. 

So, overall, all these tailwinds will support Rentokil’s medium-term growth. As earnings and revenues expand, I think the stock will follow suit as more investors buy into the company’s growth story. 

Rentokil share price risks

Of course, the company’s growth is not guaranteed. The main risks it faces right now are rising prices and competition. Although a fragmented market presents opportunities for consolidation, it also means additional competition. Rentokil’s size and economies of scale have helped the group fend off the competition up until this point.

However, investors should never use past performance to guide future potential. There will always be the risk that the business could lose market share to a smaller competitor if it takes its position in the market for granted. This is especially true in an inflationary environment. If the company hikes prices too far too fast, it could send consumers elsewhere.

However, even after considering these risks and challenges, I would be happy to buy the stock for my portfolio today. I think the pest control market will likely see substantial growth over the next few years, and the Rentokil share price may reflect this trend.

The underlying business

Rentokil has a solid underlying business model in its own right. It was already the world’s largest company in this industry. Nearly two-thirds of its revenues last year came from pest control and it has entrenched itself as the global leader in the industry. Since 2016 the company has acquired 228 companies, expanding its presence to 82 countries. From a financial perspective, what jumps out to me is that revenues that have been consistently growing over the past few years. This is backed by very chunky gross profits that are consistently either over or close to 80%. The bottom line could use a bit of a boost but with revenues growing by 14.5% in the last quarter, I’m confident in the ability of this company to continue to grow and drive up net earnings. There’s simply no FTSE 100 comparison due to the niche and scale on which this company operates.

A creepy-crawly killing FSTE conglomerate

I think that, while a 47% premium is undoubtedly quite hefty, what the market is failing to price in is all the advantages of this merger. With $2bn in revenue last year, a presence in 47 US states and a reputation as the second-largest company in the US pest control market, Terminix is a premium company. To get premium companies, you often have to pay a premium price. This deal will entrench Rentokil as the global leader. This unfettered access to the US market is coming at a time when the $22bn global pest control industry is growing rapidly. The onset of the pandemic, as well as a growing middle-class population, means that demand will continue to grow.

Last month Rentokil stated that labour shortages and Covid-19 related medical bills are driving up costs so this must be factored in. Russ Mould, investment director at AJ Bell, also noted that the deal could attract the attention of antitrust regulators in the US, which could present challenges for the company going forward. So, while I don’t think it will be smooth sailing, I think that this is a safe pick for my portfolio with loads of potential upside. Currently trading at 40 times earnings, it’s not the cheapest FTSE 100 stock right now but definitely one that I will be keeping on my radar.

FTSE 100 growth shares 

The first company I would buy is accounting software provider Sage (LSE: SGE). Currently in the middle of a transition from one-off sales to a cloud subscription model, I think the corporation is one of the best growth stocks in the FTSE 100. 

The firm’s transformation might take a few years to evolve, but I think Sage’s brand value should help pull consumers towards the business.

The stock is currently selling at a forward price-to-earnings (P/E) multiple of 33, which is a bit pricey for me. However, compared to its international peers, I think the stock looks cheap. It also yields 2.3%. 

The company’s growth could slow if the cloud rollout does not go to plan. That is probably the most considerable risk to the firm’s growth right now. 

Shares to buy 

Alongside Sage, I would also acquire CRH (LSE: CRH). The buildings materials group is currently reaping the benefits of the global construction boom. According to analysts, net profit could jump 150% by 2022 as demand for materials and prices rise. 

As one of the largest materials groups in Europe, CRH also benefits from economies of scale. This means its profit margins are wider than the industry average, and it can afford to return more cash to investors, as well as spend more on acquisitions. The stock currently yields 2.7%, and the business has been buying back shares in recent years. 

As CRH continues to grow and invest for the future, I think the stock has a bright outlook. It is also selling at a relatively affordable P/E of 15.7, which undervalues the group’s competitive advantages in my view. 

One risk that could bring CRH’s growth to a halt is an economic slowdown. This could cause demand for materials to drop and the company to miss growth expectations. 

Growth opportunity 

Pest control is not a glamorous business, but it is a growing one. That is why I would buy Rentokil Initial (LSE: RTO). 

This company is one of the largest pest control groups in the UK, but it has plenty of room to grow. It is expanding both here and overseas, where there is a steady stream of potential acquisitions. 

Figures suggest that rodent populations are rising as the world becomes warmer. This implies the demand for Rentokil’s services will continue to grow. As the company expands organically and through acquisitions, I think the stock is one of the best growth opportunities in the FTSE 100 right now. 

Some headwinds the firm might encounter include rising interest costs, leading to higher costs for the group’s debt. And more competition in the market may lead to slower growth. 

However, I think long term is how I need to be thinking if I’m to maximise my time (and profits) on the market.

Quality stock

Drinks giant Diageo (LSE: DGE) is one of the best ‘forever’ stocks going in the UK’s top tier, in my opinion. While I don’t own the shares directly, I do have a stake in Lindsell Train Global Equity. This has nearly 10% of its assets tied up in the company.

Diageo has many of the things that I look for. A global presence, an increasingly vast array of premium brands and huge margins. Collectively, these qualities should ensure the company continues growing in the years ahead.

Sure, it’s certainly faced its share of headwinds recently. The closure of drinking dens across the world last year significantly disrupted earnings. Supply chains could cause more hassle in the months ahead.

Nevertheless, the affection consumers have for Smirnoff, Guinness and Captain Morgan lead me to think I could buy and tuck Diageo away for decades and it’ll still be worth a lot more than I paid for it. This is especially true if I choose to reinvest those regularly-hiked dividends.

FTSE 100 outperformer

Scottish Mortgage Investment Trust (LSE: SMT) has been one of the standout members of the FTSE 100. In five years, its share price has surged 371% in value. In stark contrast, the index has climbed just 8%. If anything, it shows the potential gains on offer from actively selecting stocks over hugging a benchmark. 

Much of SMT’s outperformance has been down to its heavy tilt toward disruptive tech stocks like Amazon and Tesla. Unfortunately, many of these US-based companies now trade on eye-watering valuations. Should interest rates finally push higher in 2022, these could be the stocks investors jettison first.

Predicting exactly when this will happen is a fool’s errand, of course. This is why I intend to continue drip-feeding my capital into the trust for some time to come.

At £21bn, SMT won’t double in value overnight. Bar the odd (inevitable) period of downward selling pressure, I see no reason why this top tier constituent won’t continue outperforming the FTSE 100. 

Cleaning up

Its line of work may not be pleasant but pest-control and hygiene firm Rentokil Initial (LSE: RTO) is another blue-chip stock whose value should continue rising in the years ahead.

Like the other shares mentioned, RTO doesn’t present as a bargain. In fact, a P/E of 38 suggests the risk/reward trade-off isn’t in my favour. Then again, the price paid for a stock arguably becomes less important if an investor’s confidence in the outlook and intends to retain their holding for many years.

As star manager Terry Smith argues: “Over the long term, it’s what the company does that makes money, not what you do“.  And based on its most recent update, RTO looks like it’s cleaning up. Ongoing revenue rose 10% to £750.2m in Q3 as an end to Covid-19 restrictions lifted demand.

Today, I’d be comfortable buying the stock and holding for a decade. If a market crash happens, I’d be backing up the truck…