The FTSE 100 rose 12% during 2019, although that was less impressive than the growth of indexes elsewhere. With the UK still cheaper than many other stock markets, here are three shares I’d buy and hold.
Reliable business model
Electricity distributor National Grid (LSE: NG.) is a safe and reliable company, I believe. It doesn’t have the exciting, fast growth of companies operating in emerging markets or new industries. But it has other appealing qualities and, of course, a generous dividend.
Demand for electricity in the US and the UK isn’t going away. Operating in stable countries makes the firm less risky and the US is now National Grid’s biggest market, accounting for 44% of its £40bn worth of assets.
The regulated nature of most of its business gives the company good visibility on its earnings and a monopoly on electricity distribution means it can take on the debt it can afford.
The dividend yield is 5% and the aim is to grow it at least in line with RPI Inflation, so a cut is unlikely. It means shareholders are set to be well rewarded for many years to come.
Transitioning to a new model
Intercontinental Hotels (LSE: IHG) operates brands including InterContinental, Holiday Inn, and Crowne Plaza, and has nearly 5,800 hotels across 100 countries.
The group used to build and run hotels, which used up a lot of money and required borrowing. In recent years the group has moved to a slicker, more profitable hotel management model, which means running hotels for landlords and franchising. This is helping it expand quickly and is driving up margins.
The new model and its benefits haven’t gone unnoticed. Like other higher-growth, asset-light companies, Intercontinental trades on a bit of a premium to the average for the FTSE 100. Its P/E ratio is 24. I think it has good long-term prospects and the price isn’t too high for the quality of the business.
The downside is that the violent clashes in Hong Kong are currently affecting business. That shows no sign of stopping, but thinking about the long term, I believe the hotel manager looks in great shape.
A model for growth
Another quality company I like is the engineering group Avon Rubber (LSE: AVON) that produces military equipment and products for dairy farmers. As strange a mix of product offerings as that may sound, it’s working well for shareholders.
The group is the sole source provider of general purpose masks, tactical masks, powered air systems and tactical self contained breathing apparatus across the entire US Department of Defense, showcasing the quality of its customer relationships and products.
Acquisitions and a focus on product development are, I think, two drivers for the share price over the next decade. Avon Rubber does both very well, which is pushing up earnings and the dividend. Earnings have risen from 83.8p in 2017 to 91.7p in 2019, while the dividend has risen from 12.32p to 20.83p over the same timeframe.
I’d expect further growth from this company and see the P/E of 23 as a price worth paying for what I see as a great company.
