Paper money can be traced back to the year 960. The Chinese adopted it during a copper shortage and soon realized they could print as much of it as they wanted. And of course, that led to a period of hyperinflation.
Fast-forward a few centuries to 1923. After years of playing fast-and-loose with the money supply, the Weimar Republic of Germany had to issue banknotes worth two trillion Marks -- that's a two with 12 zeroes.
Next stop: 2009. People used wheelbarrows full of cash to buy bread in Zimbabwe. The lesson here? No matter how much progress mankind makes, governments will still print money -- and probably too much of it.
Sharp investors keep these examples in mind, but what they may not know is that many countries don't even print their own money anymore. They're outsourcing it.
Which brings us to another law: the private sector can usually do things cheaper and more efficiently than government can.
Some countries are getting wise to this fact -- at least when it comes to printing money.
Designing and printing paper money is a complicated business. As counterfeiters become more sophisticated, printers have to develop advanced watermarks, security threads and holograph technology to thwart the bad guys. Have you looked closely at that newly printed U.S. five-dollar bill in your pocketbook?
This ability to keep costs down and stay one step ahead is creating a lucrative business for a few companies. London-based De La Rue (LSE: DLAR) is the best example. The company has steadily gained business and now prints more than 150 national currencies. While the U.S. isn't among its customers, England, the European Union, Scotland and Singapore are on De La Rue's client list.
De La Rue's security and paper printing segment has grown by about +13% annually during the past two years. Operating margins are up +17% through the first half of the fiscal year ending in November 2009.
Earnings per share during the past five years have gained as well:
But it's not a look at the past that is what's most promising about De La Rue -- it's the future. The company estimates that more than 80% of short- to medium-term banknote demand stems from central bank policy. With interest rates in the United States near zero, the threat of inflation looming and governments around the world increasing money supply, it's safe to say De La Rue will see plenty of business.
All of the talk about the transition to a cashless society is just that. Talk. Studies show that cash is still the preferred means of daily consumer spending for most of the world and the amount of cash in circulation around the world continues to grow.
Currency printing is De La Rue's bread and butter: it accounts for 70% of revenue and carries an Operating margin of about 25%. But the company has ventured into other areas like cash processing, passports, driver's licenses and other security documents as well.
It's in this critical area where we arrive our last immutable law: Globalization. It's an unstoppable force. More countries are opening their borders to travel and trade, and it's becoming increasingly challenging for governments to keep tabs on who's going where.
In that vein, De La Rue recently secured a passport contract from the United Kingdom worth ₤400 million ($646 million) over 10 years. De La Rue estimates that government security and border concerns are causing the global ID market to grow by about +10 to +15% annually, so more lucrative contracts are likely to come.
De La Rue trades on the London Stock Exchange, so investors will have to check with their broker to see if they are able to purchase shares. Because the shares are denominated in pounds rather than dollars, investors will have the added benefit of currency diversification. De La Rue also yields more than 4%, making it an ideal pick for income investors looking for an overseas payday.