2 quality growth stocks I’d buy and hold

Recent strong performance and attractive fundamentals mean that further gains are likely, says Roland Head.

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You don’t have to invest in exotic businesses to enjoy exciting returns. Stationery retailer WH Smith (LSE: SMWH) is a pretty dull business, but its share price has risen by 227% over the last five years. That compares very well to the 70% gain delivered by the FTSE 250.

A platform for growth

Wednesday’s interim results suggest to me that WH Smith shareholders may continue to enjoy rich rewards from this stock. The group’s pre-tax profits rose by 4% to £83m during the first half, while earnings per share rose by 7% to 61.6p. Investors were rewarded with a 9% rise in the interim dividend, which was lifted to 14.6p.

The secret to the group’s growth is its growing presence in the travel market. Bored and hungry travellers at airports and railway stations have no alternative but to pay the price WH Smith is asking for their chocolate bar or drink. In my experience, the price is often considerably more than you’d pay in a convenience store, but there are no alternatives.

WH Smith’s sales and profits reflect this. Like-for-like travel sales rose by 5%, while total travel sales were up by 10%, thanks to Smith’s continued international expansion. Trading profit from travel outlets rose by 11% to £39m.

By contrast, high street sales fell by 4% and generated a flat trading profit of £53m. Falling sales of adult colouring books — a big hit last year — have apparently been offset by sales of spoof humour titles such as Five On Brexit Island.

Attractive financials

With a forecast P/E of 18 and a prospective yield of just 2.6%, WH Smith shares may not seem obviously cheap. But the group’s earnings per share have risen by an average of 13% per year since 2011. Dividend payments have increased by an average of 14% each year over the same period.

Dividend payouts are consistently covered by free cash flow and debt levels are negligible. I believe the shares are likely to deliver further gains from current levels.

Record quarterly profit

Recruitment firm PageGroup (LSE: PAGE) said that its gross profit rose by 19.7% to £170.3m during the first quarter, a record for the group. Although the increase would only have been 9.1% at constant exchange rates, it’s still an impressive performance.

Page’s shares slumped after the EU referendum but have long since recovered. Unlike some smaller firms, this company operates globally. And while “challenging market conditions” were reported in certain countries, overall growth was strong. Gross profit rose in all regions except the UK, where Brexit fears resulted in a flat performance.

Like WH Smith, Page doesn’t need to spend much on capital expenditure, and generates a lot of surplus cash. For example, 91% of the group’s post-tax profit in 2016 was converted to free cash flow. That’s a very strong performance.

The share price has risen by 6% following today’s news. This leaves the stock on a forecast P/E of 20 with a prospective yield of 2.8%. I suspect the shares still offer value at this level.

The firm’s diversity shields it from most local and industry-specific risks, and it also has a decent record of returning surplus cash to shareholders through special dividends.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended WH Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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