CSL (ASX: CSL) is one of Australia’s most famous companies—but its share price has lagged the market for years. In this episode, Mark and Shani unpack what’s happened to CSL, why it’s underperformed, and why Mark is still holding (and even buying more).

From valuation compression to dividend growth, blood plasma issues to Trump tariff threats, this episode puts CSL’s share price in context—and shows why having a clear investing process matters more than short-term price moves.

Read our view on CSL’s recent results.

You can read our Ask the Analyst on CSL, and whether they think the markets are missing something,

You can find the full article here.

You can find the transcript for the episode below:

Shani Jayamanne: For the past five years, we’ve released a weekly podcast to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis backed by the work of hundreds of researchers and professionals at Morningstar.

Mark LaMonica: We’ve shared our journeys, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor instead of the investments. It’s a guide to successful investing with actionable insights and practical applications.

Jayamanne: You’re able to pre-order the book through the links in the episode description.

LaMonica: Thank you for your continued support and we look forward to helping you invest your way.

LaMonica: Welcome to another episode of Investing Compass. The information contained in this podcast is general nature and does not take into account your personal circumstances, situations or needs.

We recently had an audition, Shani.

Jayamanne: We did.

LaMonica: And I don’t think it went well.

Jayamanne: I didn’t think so either.

LaMonica: So, I can give a little bit of the backstory that obviously we have a book coming out. We got an email from our publisher saying they were interested in doing an audiobook and asked us and they sent us a paragraph from our book each and we had to…

Jayamanne: Audition separately.

LaMonica: …audition separately. And we sent it in, and we’ve heard nothing. And then a couple of days ago, we noticed that it’s been announced that an audiobook is coming out.

Jayamanne: So, if you’re out there and you’re going to voice the book, we’d like to know, please.

LaMonica: Yeah, which I’m not I’m not totally surprised about because we get a lot of comments on YouTube and everyone is like they – for your comments, they talk about how beautiful your voice is. And then they make fun of me calling me Seth Rogen or Kermit the Frog or Fozzie Bear.

Jayamanne: There was a comment on YouTube which actually made me laugh recently, which was, it’s nice to hear Seth Rogen explaining CGT to me.

LaMonica: Yes. So anyway, it’s not surprising. I hope they get good people to play us.

Jayamanne: Yes. I mean, who would you want?

LaMonica: Oh, I don’t know. Any voice that’s not mine. But I do think that they should have the authentic accents.

Jayamanne: I think so too.

LaMonica: I know that I’m asking a lot here.

Jayamanne: Yes. Well, we’ll see. We’ll see when it comes out. It’s supposed to come out on October 6.

LaMonica: Yeah, it’s going to be very strange listening to somebody else.

Jayamanne: Tell our life stories.

LaMonica: Yeah, I’m actually – I’m listening to this book right now Young Churchill that he…

Jayamanne: Surprise, surprise.

LaMonica: Come on. Anyway, he wrote it. Churchill wrote it. And the guy that’s doing the audio book reading is clearly trying to do a Churchill impression. It’s all very strange.

Jayamanne: That’s quite funny. It actually makes me want to listen to it.

LaMonica: Yeah, especially since – I’ll let you listen to a little bit because Churchill had a speech impediment. So, it’s like very – it’s very strange. But let’s get into today’s episode.

Jayamanne: All right. So, you recently wrote an article on CSL, an article I know you didn’t really like.

LaMonica: That is true. But it did very well.

Jayamanne: Which is always a case because we always talk about how the articles that we put a lot of effort and love into always bomb, and then the ones that we aren’t 100% on or don’t really like do really, really well.

LaMonica: Which is annoying.

Jayamanne: Yes.

LaMonica: I guess people – maybe we have bad taste because we like the ones that don’t do well. I guess people don’t like it when I talk about Hemingway or Churchill.

Jayamanne: Can you blame him?

LaMonica: Not really.

Jayamanne: No. But there was more to this on CSL than you just not liking it.

LaMonica: Well, I think the other thing is that I just felt a little bit bad. And I’ll give some background just to provide a little bit of perspective. So, two years ago, I wrote an article on CSL, which was titled Something Like This Investment Checks All My Boxes. And it was an article about how I bought CSL because it fit my investment strategy and the criteria that I use to select investments for my portfolio. And the reason I feel bad is because CSL has not done well since I wrote the article. So roughly the last two years. So, it hasn’t done terribly. It just about broke even before dividends. But at the same time, I looked at the Vanguard Australia Shares ETF, the ticker VAS, which is the ASX 300. And as a point of comparison, in that same timeframe, it is up close to 19%.

Jayamanne: Now, I know you don’t feel bad because the share in your portfolio hasn’t increased in value.

LaMonica: No, that’s not it. I feel bad because I know people read things that we write. And somebody might have followed my lead there. And there’s all sorts of caveats, of course, I can come out with. It’s only two years. And I do consider that short term. And if you have a diversified portfolio, not everything is going to do well, but I still feel bad.

Jayamanne: Maybe it’s worth taking a step back and talking about why we sometimes talk about things that we’re doing in our own portfolios. And one of the challenges about being an investor is that you are constantly bombarded with opinions about investments, and context is rarely provided. For example, you may read in some media account that a portfolio manager is recommending three different shares. What is almost never said is what the portfolio manager is trying to accomplish or even why they’re recommending a share other than a brief line that summarizes what may be extensive research.

And once you read this account, you never hear anything from them again about the particular share. So, what we want to do is provide the context to go through the process of what we think about a share or ETF and whether it fits our investment strategy and what we’re trying to accomplish. We think the process is much more important than our ultimate decision and think people will benefit from following that process based on their unique circumstances.

LaMonica: And the other thing I would add, Shani, is that we are not professional money managers. We don’t get paid to invest other people’s money. So, when we say we bought something or owned something, it is our money that’s actually at stake there. And I think the idea is to take the investment theory that we often talk about and try to apply it in real life to make it more approachable and realistic. So just to put that theory into practice.

Jayamanne: So that was a very long introduction.

LaMonica: It was, Shani. And now, I’m going to say something for a long time because we were trying to have Shani say this, but it said, Mark breaks down. And I was breaking down how CSL was doing, not having one of my many breakdowns. And Shani could not get through it without laughing.

So, the point I was trying to make in the article is that a lot of investors look at price movements and they don’t put the time in to actually understand the context of those price movements and the drivers of those changes in prices. So, I’ll walk through what’s happened with CSL. So, over the long term, CSL has been an incredible stock. So, if you owned CSL in 1999 and held until today, the price has gone up 5,391%, which is incredible. But in the period I focused on, so roughly the last five years, things have not been so good. So CSL peaked in January 2020 at around $312 a share, and they bounced around a lot since then. But as of the 12th of August, they’re down about 16% from that peak. And we often talk about the three drivers of share returns. So, do you want to provide a quick reminder, Shani?

Jayamanne: I can. The first driver is dividends. That’s an obvious one. The second is changes in valuations. So, if investors are willing to pay more for each dollar of earnings, the share price will go up. If they’re willing to pay less for each dollar of earnings, the share price will go down. And then there is earnings growth. If valuation levels stay steady and earnings grow, the share price will go up.

LaMonica: And we’ll use that context when we look at CSL. So, between fiscal 2020 and fiscal 2024, earnings grew just under 25% in total. So given the fact that earnings were growing at CSL, the decline can be attributed to investors paying less for those earnings. And that is the case. So, the average annual price to earnings ratio in fiscal 2020 was 40.8. In fiscal 2024, it was 32.5.

Jayamanne: And valuation levels are all about expectations for the future. Now, in the case of CSL, we can see there is a difference between the valuation level on the share and the overall market. Market valuation levels are higher. As Mark pointed out, the valuation on CSL is lower. So, investors are clearly less confident with the prospects for the company.

LaMonica: And in the case of CSL, this was a bit of a perfect storm, is there was this constant stream of things for investors to worry about. There were issues collecting blood during the pandemic, which led to margins dropping in CSL Behring, which is their largest division. There was a company they acquired, Vifor Pharmaceuticals, that investors weren’t crazy about. There were worries about weight loss drugs and how that will impact their chronic disease treatments. And now there are the Trump threats on pharmaceutical tariffs.

Jayamanne: And one thing you noted in the article was that in 2020, CSL was trading at 40 times earnings. And that is very high for a large company, which makes those expectations very hard to meet.

LaMonica: That is true. And the valuation level is at a more reasonable level now. So, as an aside, and when we’re recording the CBA actually just reported earnings yesterday, the one thing that’s shocking is that from a price to earnings perspective, CSL and CBA are trading at similar levels. And that’s pretty shocking because banks never trade at valuation levels that high, especially banks that are growing as slowly as CBA is. So that’s my little aside, Shani. I broke that down for you.

Jayamanne: Okay. Well, we can’t go a day without someone saying how crazy what’s happening with CBA is. So, thank you for filling that quota.

Let’s get back to CSL. So, you’ve walked through the context of why CSL has performed the way it has, but why don’t you talk about why it fits your investment strategy?

LaMonica: And this is the most important part of the whole episode, other than the introduction, us talking about our failure at our audition. But we said at the beginning, and we said why we do episodes like this is because we think the process of investing, which is finding things to buy that fit your investment strategy, that is the key to being a successful investor. And your investment strategy is aligned to a goal, and that takes your edge, your competitive advantage into account, and also looks at your temperament and what you’re comfortable with as an investor.

Jayamanne: So, this is when you’re going to start talking about dividends.

LaMonica: I am Shani. My goal, as I’ve said often on this podcast, is to build a stream of passive income that grows at a rate that is meaningfully higher than inflation. And my strategy is designed around that goal. Basically, what I’m looking to buy are boring companies, non-cyclical companies with moats that have lower levels of business risk.

Jayamanne: And in your view, this was CSL, or at least it was two years ago when you bought the shares.

LaMonica: It was. As I said at the beginning, CSL checked all of these different boxes. And there is more detailed criteria, but at a high level, those are the criteria that I have when I look for investments. So CSL had a moat, it had lower levels of business risk, it was non-cyclical, it was in good financial shape. And more importantly, for the timing of my purchase, the shares had fallen since that high in 2020, and they were trading at a more reasonable valuation level.

Jayamanne: So how have things gone on the dividend front since you purchased the shares?

LaMonica: The dividend it purchased was $3.38. Today, it is more than 25% higher at $4.25. So that part has worked out well, but the share price hasn’t moved. And while I definitely don’t care as much about price appreciation as some investors, it obviously still matters to me. That’s a key part of why everyone invests.

Jayamanne: Now, you made a comment about two years being a short term. And I was thinking back to the Morningstar conference that we attended in May, and there was a panel on Aussie equities where CSL was talked about.

LaMonica: That’s true. And they were all quite positive about the company.

Jayamanne: They were, but I wanted to quote from one of the panelists, Crispin Murray, the Head of Equities at Pendal, he had the following to say about the challenge of investing during volatile markets. So, he said, “The challenge for fund managers is to take advantage of that, and by that, he means volatility, as it actually creates more opportunity. We like volatility. We like uncertainty. We have lots of resources. We have lots of contacts with companies, so we can take advantage of that. But you also need to manage a portfolio in a way that you don’t get stocked out. You don’t get caught out because the volatility and the correlation in your fund is so great that you get forced to close down or your clients pull the money before you get proven right.”

LaMonica: Which is a very telling quote, Shani.

Jayamanne: It was. And I wanted to hear your opinion on how that plays into your thoughts about two years being a short time period and the idea that your investment strategy should take into account your edge as an investor.

LaMonica: Well, that quote from Crispin, what he was basically saying is that professional investors often don’t have the luxury of time. So, they not only need to be right, but they need to be proven right before investors pull their money out of the fund. So, from a professional investor standpoint, underperforming for even a quarter can result in investors pulling money out. So, they would look at this purchase of CSL and say it was a huge mistake. For me, I have the luxury of time and don’t have any of those structural impediments that influence how I invest. And so, to get back to part of your question, that is my edge. That’s what I think my edge or competitive advantage is as an investor.

Jayamanne: So, you’re kind of alluding to your answer here, but what are you going to do with your shares?

LaMonica: I’m going to keep the shares. And I actually did add to my position a little bit earlier this year. I’m obviously happy with the dividend growth and expect that to continue. But I also think things will work out from a price perspective. The shares are cheaper than they were in 2020. And our analyst Shane thinks earnings will grow 12% a year for the next five years.

Jayamanne: And if that happens, it would contrast with the ASX index as many companies in Australia are growing quite slowly.

LaMonica: That is true. And there’s a lot more detail. I obviously just summarized Shane’s view. And I put a lot more detail in the article about what he thinks and why he thinks those earnings will grow so quickly. And that is in the show notes. But ultimately, my original thesis on CSL has not changed. It still meets my investing criteria that’s outlined in my strategy. It still has a moat. It still has lower business risk. It’s still in good financial condition. And I think the pathway to growth is there, and that will drive the share price higher in the coming years. Obviously, anything can happen in the future. But I believe the investment process I’ve gone through gives me a good opportunity for success with this investment.

Jayamanne: And I think that is the lesson here to put price movements into context, align a strategy to your goals and work on consistently applying that strategy to the process of picking investments. That doesn’t guarantee any single investment decision will work out. But it does give you the best chance of successfully achieving your goals.

LaMonica: Great. Well, thank you very much for listening. Shani and I really appreciate it. And we’ll be back next week with a new episode.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

The book is currently in presale which is an important time to build momentum. If anyone would like to support this project you can buy the book now. Thanks in advance!

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