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Investment Times

Shares for all ages

| 1 June 2017 | A A A
Shares for all ages

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

"Young investors seek growth, older investors want an income." It's a common and not always accurate notion, but a description that is perhaps more appropriate when applied to companies.

A young company should have plenty of opportunities to reinvest profits and will tend to hold on to cash to fuel hopefully rapid growth. Mature businesses often find themselves with fewer growth opportunities and are happy to return profits to shareholders as dividends or share buybacks.

Here we look at one young, one established and one mature company, all of which we think have long-term potential. Remember past performance is not a guide to future returns, and yields are not a reliable indicator of future income. The value of investments can fall as well as rise so you could get back less than you invest.

Purplebricks - first-time buyer

Since launching in 2014, Purplebricks' online model has been wreaking havoc among UK estate agents. For £849 (£1,199 in London) a Local Property Expert will provide a valuation, manage advertising and provide a point of contact for interested parties. Sellers have to show potential buyers around themselves, but with Which? putting average high street agent commissions at 1.3%, there is serious money to be saved.

Purplebricks has been investing heavily in growth, with the number of Property Experts up 156% in the 12 months to the end of April. That investment seems to be paying off. The group delivered its first ever operating profit in the first half of last year and is on course to deliver a positive 2017 result, with instructions up 83% in the second half.

Plans are ambitious. The system is being rolled out in Australia, where customers save an estimated A$12,000 compared to traditional commission. In February the group announced a £50m fundraising for expansion into the US. With the market value estimated at $70bn the opportunity is significant, though this is also a risky step, as cracking the US market is notoriously difficult.

The cost of the US expansion means that while we might see a profit this year, 2018 could see the bottom line turn red again. However, progress has been rapid and we think the fragmented nature of the estate agency market means there is scope to seize considerable market share.

Smaller company shares are higher risk, and corporate governance and regulatory oversight are less stringent on AIM than the main market.

Purplebricks share price, charts and research

Merlin Entertainments - a growth spell

Merlin Entertainments emerged from private equity ownership in 2013 and is the second-largest operator of visitor attractions in the world – topped only by Disney.

UK theme parks, such as Alton Towers and Thorpe Park, may be mature, but the group has growth opportunities elsewhere. LEGOLANDs are opening around the world, while the Midway division, which operates city centre attractions, is rolling out Sea Life Centres and Madame Tussauds to cities around the globe.

Merlin’s established businesses generate significant amounts of cash. That has allowed it to fund expansion without turning to shareholders and still offering a steadily growing dividend. Analysts estimate a prospective yield of 1.5% for 2017.

International earnings mean Merlin has been a beneficiary of the weaker pound, and the overseas business is growing. New Midway attractions are opening in Melbourne, India and Berlin while Asia is a focus for new LEGOLANDs, including Japan and Korea, with plans afoot for parks in New York and China.

However, consistent expansion means Merlin carries a reasonable amount of debt: a little over £1bn at the end of 2016. That’s comfortably within management’s target range, but a global downturn could leave it exposed.

Overall, we think the combination of cash generation and expansion opportunities is an attractive one. Aquariums have enduring appeal, the selfie has done wonders for Madame Tussauds and LEGOLAND is a fantastic brand. With 117 attractions worldwide there’s some way to go before Merlin bumps against the side of the tank.

Merlin Entertainments share price, charts and research

Legal & General - a quiet retirement

Founded in 1836, Legal & General is certainly well-established. However, the decline of defined benefit (DB) pension schemes and changes to pension rules have transformed the way people save for retirement, and that’s shaken things up for life insurers as well.

L&G has been growing its asset management business significantly in recent years, and an early entrance into tracker funds has made it a market leader in low-cost investment products. We think that’s a market with considerable potential, as individuals take on more responsibility for their retirement saving. Auto-enrolment has speeded up the process, with an extra £17bn expected to flow into workplace pensions by 2019/20.

Elsewhere, L&G continues to see demand for its bulk annuity schemes and liability-driven investment products. These allow companies to de-risk existing pension schemes, and the UK market alone is worth an estimated £2 trillion. L&G is now venturing into the US, where the market is estimated to be four times larger.

However, there is no getting away from the fact that pensions is a mature industry. Growth is likely to be steady rather than spectacular. Fortunately, L&G’s ability to generate cash is impressive. Asset management does not face the same regulatory capital requirements as insurance and that has allowed it to grow the dividend every year since 2009, at a compound rate of 21% per year.

Analysts are currently forecasting a yield of 6.1% for 2017, though this is only an estimate and there are no guarantees.

Legal & General share price, charts and research

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. 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.

Nicholas Hyett owns shares in Legal & General.

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.