Nicholas Hyett 19 October 2017
Business pages everywhere are full of shares that are going to change the world. Super high growth, ‘shoot the lights out’ stocks can make for great investments, but that shouldn’t mean investors lose sight of less glamorous businesses that have churned out steady performances for decades.
These companies may not be as exciting, but when it comes to hard earned savings, a quiet life is no bad thing! In our view, a business that has achieved steady profit growth, accompanied by a rising dividend, is worth any investor’s attention.
Please remember that past performance is not a guide to future returns. Yields are variable and not a reliable indicator of future income. The value of investments, and any income from them, can fall as well as rise, so you could get back less than you invest.
Greggs – Profits baked in
In an environment where consumers are increasingly health conscious, Greggs might seem to like it’s fighting an uphill battle. However, the baker from Tyneside has done an excellent job of transforming itself into an on the go food giant.
While it may not be the most exciting business in the world, Greggs has a fantastic track record. Had you invested £1,000 when it first listed on the stock market in 1984, you would today be able to buy 246,230 Greggs Sausage Rolls, with 24p change.
We probably won’t see that kind of growth in the years ahead, unless the group can convince the French to abandon baguettes in favour of the steak slice. Greggs has ambitions for further growth, but with 1,800 stores nationwide the group is likely reaching the end of its roll-out phase.
That being said, Greggs still has plenty of attractive qualities.
Its offer is a simple one - fresh food, at low prices - and is hugely popular with customers. Like-for-like (LFL) sales have continued to grow despite the relatively mature store estate.
Greggs might still be famous for its sausage rolls, which remains its best seller, but management have a very done a good job of expanding the offer in recent years. The breakfast rush is the group’s fastest growing time of the day, thanks to dedicated breakfast deals. A wider choice of healthier foods is also driving growth.
There are short term challenges, including the impact of the national living wage, and cost inflation as a result of weaker sterling. Stubbornly high levels retail price inflation, comfortably outpacing wage growth, won’t be helping Gregg’s customer either.
However, the group has met the cost pressures head on and has been investing in new capacity and increased efficiency. That resulted in £7.1m of cost saving last year, and management expect a similar level this year.
The stock currently offers a prospective yield of 2.9%, and a track record of maintaining or growing the dividend stretching back to 1998, which has the potential to be very attractive – however no dividend or performance is guaranteed.
Compass Group – Serving up, cheap, tasty growth
Compass Group provides outsourced catering services to businesses and governments in over 50 countries worldwide. It employees 500,000 staff and serves 5bn meals a year everywhere from offices to oil rigs. The office canteen may not be flashy, but it has proven lucrative for Compass over the long term. Revenue is up 84% in the ten years to 2016 and profits have seen an even more impressive 256% rise.
Compass stands out because growth generally requires little capital expenditure. Clients already have the kitchens, Compass simply provides the staff and expertise to keep them running. Steadily rising profits and little need for capital investment mean the group is robustly cash generative.
That has allowed it to deliver some very attractive returns for shareholders. The dividend has increased every year since 2001, with the stock now offering a yield of 2.3%, and has been accompanied by substantial share buybacks.
The group’s scale and huge customer base means that it’s well diversified and growth will tend to track GDP growth. However, that also leaves it exposed to global downturns. Its natural resources focussed Remote & Offshore division was hit hard by the 2014/15 commodity crash, for example.
Management aren’t simply aiming to track the global economy though. With 80% of the global food service market currently run either in-house or by smaller regional players, Compass sees plenty of opportunity to seize market share and grow ahead of the market. As such, small bolt on deals are likely to play a part in Compass’ future.
Our concern with Compass, is its long track record of dividend growth and stable revenues have not gone unnoticed by the market. Recent years have seen the shares climb significantly above their long term price to earnings ratio, as low interest rates have forced income seeking investors to look further afield. If interest rates were to tick up rapidly, that rerating could unwind.
Clarkson – Shipping in a good performance
Clarkson services the shipping and offshore oil & gas sectors. Shipping is a naturally volatile sector, rising and falling in line with the economic tide. Against that background Clarkson has demonstrated an impressive level of resilience, having consistently grown the dividend for the last 14 years.
Its performance is partly a reflection of the group’s diversity. Shipbroking, which sees Clarkson match ship owners with cargos as well as arrange the sale and scrapping of ships themselves, accounts for 86% of profits. But it also offers investment banking services, logistics and market research.
The group has seen steady market share gains in recent years, and analysts at JPMorgan put the group’s overall share of the broking market at around 20%, making it the clear market leader.
Since the broking business makes its money by charging a percentage of the cost of shipping, the dramatic fall in indices like the Baltic Dry (which measures the cost of shipping raw materials by sea) since the financial crisis should have really hurt Clarkson. However, the group has continued to thrive. Shipping costs are starting to creep up again now, and that should play to Clarkson’s advantage.
Price is only one side of the equation. Global trade tends to increase over time, as global population and wealth increases, and since 85% of global trade is carried by sea, the shipping industry tends to grow as well. More cargo at higher prices should be the twin engine driver for Clarkson’s long term potential.
The group is debt free, which should reassure those worried about the cyclical nature of what Clarkson does. However, the recently integrated investment banking business is a particularly cyclical part of this already cyclical industry.
The shares currently offer a prospective yield of 2.6%, but, like Compass, Clarkson’s track record has not gone unnoticed by the market. The stock currently trades on a price to earnings ratio of 22.2, an eye-watering 71% above its long term average.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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