COMMENT
The FTSE's Fastest-Growing Companies

There's a well-used saying in the stock market that "elephants don't gallop". It was coined by Jim Slater when he compared the slow earnings growth of jumbo companies to elephants. He also likened growth of some smaller businesses to fleas. He said that fleas can jump over two hundred times their own height.

However, extraordinarily high growth rates are not always that desirable when investing. For instance, what is the point in seeking out companies which are growing at 50% or more a year when we know that those mouth-watering growth rates are unlikely to be maintained for many years? Instead, looking for sustained fast-growing blue chips may be a better option.

Vodafone (LSE: VOD), despite its mammoth £87 billion price tag, is a good example of a fast-growing blue chip. Over the last five years, earnings at Britain's biggest phone company have grown at a compound annual rate of 17%. This has led to profits more than doubling in just under half a decade. Revenues have expanded in tandem, too, which suggests that growth in profits at Vodafone has been led largely by rising sales.

Smaller rival O2 (LSE: OOM) is another company which has grown revenues quickly. This has allowed it to swing from a loss of £956m in 2001 to a profit of £576m this year. Furthermore, profits are expected to climb rapidly, with a 22% improvement pencilled in for 2006.

Other fast-growing technology, media and telecom (TMT) businesses include Sage (LSE: SGE) and digital TV company BSkyB (LSE: BSY). Accounting-software firm Sage is particularly interesting, because it has delivered double-digit earnings growth for almost a decade. What's more, this is expected to continue into 2006.

Apart from TMT companies, Smith & Nephew (LSE: SN.) and Tesco (LSE: TSCO) are also outstanding blue-chip growth businesses. Over the last five years, Smith & Nephew and Tesco have seen their earnings grow at an compound annual rate of 15% and 14% respectively.

Interestingly, the six blue chips highlighted here do not conform to the rules that we normally associate with growth businesses. Generally, growth companies don't pay a dividend, because they would rather invest retained earnings in capital projects. But all six companies distribute some of their profits as dividends. By and large, growth companies are also characterised by unusually high P/Es. But Vodafone's P/E of twelve and Tesco's valuation of fifteen times earnings are not overly expensive.

It seems that elephants can indeed gallop. Of course, elephants may not be quite as nimble as Jim Slater's "fleas". Still, a journey on a galloping elephant is usually less precarious than riding on the back of a less predictable flea!

David owns shares in Vodafone.