You can have it good, fast or cheap — but you can only pick two.
This old project management saying can equally be applied to investment. If you’re looking for good quality stocks with the potential to deliver steady gains, you probably won’t get them cheap.
Today, I’m looking at two stocks I think have the quality needed to make them profitable buys, despite both having risen by more than 30% over the last year.
This triple bagger could hit the spot
Financial firm Jardine Lloyd Thompson Group (LSE: JLT) may not be a name you’re familiar with. But this FTSE 250 speciality insurance and employee benefits provider has tripled in value since November 2009, while also delivering dividend growth of 65%.
2017 was another year of good progress. The group’s revenue rose by 10% to £1,386m, while underlying pre-tax profit rose 11% to £191.5m. Underlying earnings rose by 14% to 58.5p per share, in line with analysts’ forecasts.
The total dividend for the year was lifted by 5.6% to 34p per share, giving a trailing yield of 2.6% at the last-seen share price of 1,330p.
High margins = high returns
Groups with multiple businesses sometimes depend on one division for most of their profits. That’s not the case here.
Jardine’s insurance businesses delivered an underlying trading profit of £197.9m last year, at a trading margin of 19%. The group’s employee benefits division delivered £50.1m of underlying trading profit, at a margin of 16%.
Although the amounts vary, profit margins across the group’s businesses are fairly high and quite closely matched. This suggests to me that all parts of the business are pulling their weight.
These shares now trade on a 2018 forecast P/E of 19 with a prospective yield of 2.6%. In my view this could be an attractive opportunity if you’re looking for a buy-and-forget dividend stock.
A class-leading performer
Another financial stock I like is IG Group Holdings (LSE: IGG). This FTSE 250 firm is the UK’s largest and oldest CFD trading firm. IG allows investors to trade Contracts for Difference and place spread bets on a wide range of securities and markets.
This has always been a very profitable business. Over the last five years, the group’s operating margin has averaged 43% and its return on capital employed has averaged 32%. The dividend has risen by an average of 7% per year, supported by very strong cash generation.
The risk is that profits could be hit by proposed new regulations which will limit the amount of leverage available to retail customers trading CFDs. This could mean that trading levels are much lower than at present, reducing the revenue earned by companies such as IG.
London-based IG hopes that diversifying overseas and focusing on high value professional investors — who are expected to be unaffected by the new rules — will protect its profits.
The group’s shares have performed strongly over the last year, as investors have accepted the company’s view that any hit on profits will be limited. Earnings per share are expected to fall by 7% in 2018/19, leaving the stock on a forecast P/E of 15.7 with a prospective dividend yield of 4.7%. In my view this could be a good entry point for long-term investors.
