When it comes to selecting stocks for a starter portfolio, I believe that you can’t go wrong with engineering group James Fisher and Sons (LSE: FSJ).
At first glance, this might not look like the market’s leading income or growth stock, but if you look at the company’s performance over the past decade, it quickly becomes apparent that this business is built for the long term — making it a good pick for beginners.
Indeed, over the past 10 years, the company’s earnings per share and dividend per share have grown at a steady rate of around 10% per annum, while book value per share — a measure of business wealth — has increased at an average rate of 14% per annum over the past six years.
Today the company reported that during 2017 it managed to achieve a similar rate of growth. Underlying profit before tax grew by 10% thanks to revenue growth of 9%, and statutory profit before tax increased 9% allowing management to increase the total dividend per share by 10%, the 23rd consecutive year of dividend growth.
Innovation is key
James Fisher’s management attributes the group’s steady double-digit growth rate to its international presence, high-quality management and reputation. Long-term chairman Charles Rice will step down at the beginning of May. But he believes the firm’s “stable management team” and “continued commitment to a decentralised management structure which keeps decision-making close to our customers and markets” will ensure it continues to innovate and can grow for many years to come. In my view, this focus on innovation more than justifies the high valuation of 16.3 times forward earnings.
What’s more, for dividend investors there is also plenty to like as the payout is currently covered nearly three times by earnings per share, giving plenty of room for growth in the years ahead. The shares support a dividend yield of 2.2%.
Slow and steady
Another stock that I believe should feature in any beginners’ portfolio is A.G. Barr (LSE: BAG). This is another business that initially looks expensive, but its record of expansion and well-established brands mean that it is well placed to continue to grow steadily for the foreseeable future. As my Foolish colleague G A Chester previously pointed out, the shares have returned over 14% p.a. for the past decade.
The shares currently trade at a forward P/E of 19.9 and support a dividend yield of only 2.5%. This payout is covered twice by earnings per share and has grown at a steady rate of between 5% and 10% over the past five years. There’s no reason why this rate of growth cannot continue as City analysts expect the company’s earnings per share to rise by 10% over the next two years. Further, over the past five years, it has been cleaning up its balance sheet and has virtually eliminated all of its debt, enabling it to announce a £30m share buyback at the beginning of last year.
Compared to its current market value of £735m, a buyback of £30m is a meaningful return to investors. If management continues to reinvest excess free cash flow into buybacks and dividends, shareholders could be in line to receive healthy returns in the years ahead, indicating to me that this is a great investment for investors of all experiences.
