Can growth continue with these stalwarts, and are the shares cheap?
Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:
- growth in earnings, and
- an upwards P/E re-rating.
Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But, whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.
Seeking durable growth
Not all companies achieve stable growth as you can see by the aggregate performance of those in London's premier FTSE 100 index (UKX), where the compound annual earnings-growth rate has been just 0.7% over the last five years:
|Year to June||2007||2008||2009||2010||2011||2012|
|FTSE 100 index||6,608||5,626||4,249||4,917||5,946||5,571|
|Aggregate earnings per share||537||503||427||397||527||557|
Consistent, cash flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20% (you can see all of the companies I've covered so far on this page).
Over the last few weeks, I've looked at Tate & Lyle (LSE: TATE), BAE Systems (LSE: BA), Bunzl (LSE: BNZL), SABMiller (LSE: SAB) and Imperial Tobacco Group (LSE: IMT). Let's look at how each of them scored against my five earnings growth and valuation criteria (each score in the chart is out of a maximum five):
|Outlook and current trading||4||4||4||4||4|
|Enterprise value/free cash flow||1||1||2||2||2|
|Total (out of 25)||15||12||16||16||15|
There is good industry diversification available from this group of Stalwarts.
Tate & Lyle uses large-scale manufacturing plants fitted with innovative technology to turn raw materials into ingredients that add taste, texture, nutrition and increased functionality to products used by millions worldwide. Although known by many for its consumer products such as Splenda and Lyle's Golden Syrup, the firm actually generates around 75% of revenue from supplying additives for the food and beverage-manufacturing sector.
Aerospace & Defence
Global defence, aerospace and security company BAE Systems employs around 93,500 people worldwide. Its products and services include air, land and naval forces requirements such as advanced electronics, security, information technology and support services. In effect, the company supplies many of the world's fighter planes, radar, attack missiles, warships and munitions. Right now, the company is trying to engineer a merger with Franco-German group EADS, but it's a move that large shareholders and the British government seem to be resisting.
Bunzl has created an efficient distribution chain to get the consumables that businesses use, rather than sell, to where they are needed. It supplies companies with things like food packaging, disposable tableware and catering equipment, cleaning and hygiene supplies, guest amenities, personal protection equipment, packaging and healthcare consumables. North America provides 54% of revenue, Europe 21%, UK & Ireland 20% and the rest of the world 5%. Its good business that has generated a steadily rising earnings stream that has not been over-looked by investors.
SABMiller describes itself as one of the world's leading brewers with more than 200 beer brands and some 70,000 employees in over 75 countries. It also has a growing business in soft drinks and claims to be one of the largest bottlers of Coca-Cola products. Brits might be familiar with the firm's popular Miller Lite and Grolsch brands. The company enjoys strong positions in both emerging and developed markets worldwide. I reckon beer drinking can be almost as addictive as tobacco smoking, so there's likely to be a steady stream of repeat business. If SAB can keep converting those revenue streams to cash flow and profits, it's unlikely to lose its Stalwart credentials any time soon.
Die-hard European smokers stand alongside worldwide puffers to stuff Imperial Tobacco's and governments' coffers. The company is shipping cigarettes to more than 160 countries worldwide. It's cash-generative business, reflected in the healthy looking dividend. If Imperial can keep converting demand into cash, as it has been, the prospects of continued earnings growth seem promising despite the escalating drag of anti-smoking legislation.
Further ideas for capital gains
Those five shares have been among the several steady-earnings-growing stalwarts trading on the London stock exchange and, if growth continues, each has the potential to deliver significant capital appreciation when purchased at sensible prices.
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> Kevin does not own any shares mentioned in this article.