When it comes to evaluating potential investments, I like to consider a company’s historical record of creating value as part of my process. Indeed, while past performance is not a definitive guide to the future, it does give investors an interesting insight into a business’s potential.
Hiscox (LSE: HSX) is a great example. Over the past 15 years, shares in this insurance giant have produced a total compound annual return for investors of 15.1%, turning £1,000 into £8,200.
I believe this performance is set to continue.
Growing business
Today Hiscox reported yet another set of strong results, sending the shares up by just under 8% at the time of writing.
It reported numbers for the first half of the year, noting “strong growth” in insurance premiums written across the group. Pre-tax profit increased 27% to $164m following an increase of 21% to $2.2bn in the value of insurance premiums written.
The group’s combined ratio, a quick and easy measure of insurance profitability, declined to 88% down from 91% in the previous period (if the combined ratio is less than 100%, the insurance business is profitable).
On the back of these numbers, Hiscox’s management has rewarded shareholders with a 5% increase in the interim dividend. The current dividend yield is 2.3%.
The bulk of the company’s growth over the past few years has come from its retail division. According to today’s update, this business is on track to hit 1m customers this year, which is still relatively small compared to the size of the insurance market. Motor insurer Admiral, for example, has nearly 6m customers, so there’s plenty of room for Hiscox to expand further in my view.
As it continues to invest and build out its retail business, I believe that it can continue to produce double-digit annualised returns for investors. And looking at City expectations for growth, the shares are not too expensive either as they trade at a 2019 forward P/E of 16 — not too bad for a business that is expected to grow EPS 31% over the next two years.
Income champion
Another company that has a record of producing market-beating returns for investors is River and Mercantile Group (LSE: RIV).
This asset management business has attracted my attention due to its dividend potential. This year, analysts have pencilled in a per share payout of 17.1p, giving a dividend yield of 6%. Next year, the company is expected to hike its distribution 10%, which will provide an estimated dividend yield of 6.6% at the current price.
Like Hiscox, River and Mercantile is also benefiting from rising demand for it services. According to an update published by the company today, fee-earning assets under management increased 9% across the group for the 12 months ended 30 June, putting the firm on track to hit the City’s EPS growth target of 17% for 2018. Based on this estimate, the shares are trading at a forward P/E of 14.8, an attractive multiple for a business growing earnings at a double-digit rate.
What’s more, this company has more than £20m of net cash to back up the dividend. In fact, this cash balance is equivalent to just under 10% of River’s current market capitalisation of £232m.
