I’ve been looking at some of the most popular big-cap shares on the London market and asking the question, “How will they fare in 2017 and beyond?” I think these three FTSE 100 companies have some of the most attractive prospects for investors in terms of total returns.
A select few
During my search, I eliminated as much cyclicality as possible, which meant out with the financials, the insurance companies, the commodity firms and retail shares. Out went the troubled supermarket sector, too, and anything else relying on a trading recovery to advance.
The result is three firms with robust immediate prospects for growth in earnings generated by well-defended market positions. These shares have the potential to reward investors with both capital gains and a rising dividend yield in the years to come.
British American Tobacco (LSE: BATS), Diageo (LSE: DGE) and Reckitt Benckiser Group (LSE: RB) all deal in consumer products that don’t last very long. Because the products are deemed ‘essential’ for many customers, they return repeatedly to re-buy and that tends to lead to stable, predictable inflows of cash for these firms.
Compounding plus benefits
Solid cash flow enables steady dividends, which makes these companies ideal for an investing strategy that focuses on compounding, where dividends are reinvested back into the firms’ shares to create an ever-increasing pot of invested funds.
Compounding is good in itself, but imagine how that compounding pot of funds might be turbocharged if the underlying businesses were growing as well. Rising income and increasing revenue could enable the dividend payments to grow year on year – and the firms’ share prices are likely to rise, too.
There’s good news on that front. City analysts following these companies predict immediate growth in earnings ahead. For 2017, they expect British American Tobacco’s earnings to grow 14%, Diageo’s 16% and Reckitt Benckiser’s 15%.
Between them, these companies deal in products and brands in the sectors of tobacco, alcoholic drinks, health and hygiene. These are all things that people tend to keep buying no matter how austere the economic times become and it is that quality that makes these shares defensive.
The defensive/cyclical scale
Contrast defensive businesses with the other end of the scale where cyclical companies reside. The cyclicals tend to deal in goods and services that last longer and which customers often cut from their budgets when times are hard. Cyclicals end up with fluctuating revenues, profits, cash flow and share prices as the macroeconomic environment changes.
Defensive firms like BATS, Diageo and Reckitt Benckiser are more likely to remain evergreen. That makes them ideal investments for the compounding investor. So if other investors lose interest in these companies and the share prices ease off, I’ll be looking to buy more of what I know to be a good thing.
If you are a long-term investor with a focus on compounding, I think it is worth keeping an eye on BATS, Diageo and Reckitt Benckiser with a view to buying the shares — particularly on any sign of share price weakness.
