From 6 April 2016, we get another ISA allowance of £15,240, and that’s a tax-free investment opportunity worth grabbing.
Leading with quality
I’m looking for firms that can pay a reliable and growing stream of dividends in the years to come. If the company has a quality business with strong cash flow, capital growth should follow. Expanding dividend payments and a rising share price mean a double win that should drive pleasing total returns.
Quality firms can go on my watch list waiting for a sensible entry point, such as during periods of general market weakness, or when a temporary issue knocks the firm’s share price.
Today’s focus is on GlaxoSmithKline (LSE: GSK), Diageo (LSE: DGE) and PZ Cussons (LSE: PZC).
Defensive attributes
These firms attract because of their defensive qualities. GlaxoSmithKline, the pharmaceutical giant, trades in an industry characterised by consistent demand, and people often repeat-purchase the firm’s products. That set-up tends to generate reliable flows of cash for GlaxoSmithKline. Meanwhile, Diageo’s alcoholic drinks output also feeds into a consumer-driven market. People come back repeatedly for their favourite tipple and that translates into a reliable cash stream for Diageo.
PZ Cusson’s portfolio of consumable goods brands in the personal care, home care, beauty, food and nutrition markets is also a great cash generator. The common theme linking these three firms is that they all sell stuff that people need over and over again, profitably.
Outlooks
In February, GlaxoSmithKline’s chief executive said: “For 2016, we continue to expect core EPS percentage growth to reach double-digits on a constant currency basis, although we are also mindful that the macroeconomic and healthcare environment will continue to be challenging.”
Despite possible headwinds, GlaxoSmithKline looks set to lumber through 2016 and beyond. The firm announced a special dividend for 2015 and that strikes me as a good indicator that the firm remains in good health.
In January, Diageo’s chief executive said: “While trading conditions remain challenging in some markets, Diageo’s brands, capabilities in marketing and innovation and our route to consumer have proved resilient. I am confident that Diageo can deliver improved, sustained performance.”
Diageo’s top man is confident that the drinks provider can keep powering forward and so am I. The firm operates in an attractive industry and enjoys substantial economic moats with its popular brands.
Commenting on the firm’s interim results in January, PZ Cussons’ chairman said: “These are a steady set of results in what have been challenging markets with overall revenue and profitability broadly flat versus the comparative period. We remain confident about the medium and long-term opportunities which should begin to materialise.”
I’m also confident that PZ Cussons’ business model will keep it afloat and steady in difficult times, and growing nicely in the good times.
All three of these firms operate good quality, cash-generating and enduring businesses, and because of that, their valuations tend to look a little pricey at times. However, buying on dips, down days and during times of general market malaise can be one way of building up a position in the longer-term growth stories on offer. That’s why I think they’re good candidates for my ISA watch list.
