Surviving on the State Pension in older age could prove to be a major challenge for many people. After all, it amounts to around a third of the average annual wage in the UK. This means that a retirement nest egg that can provide a passive income in older age may be required.
With the FTSE 100 currently offering a number of companies with long-term growth potential, now could be a good time to invest in large-cap shares.
Here are two such companies that may offer improving capital returns that ultimately allow you to enjoy greater financial freedom in older age.
Alcoholic beverages company Diageo’s (LSE: DGE) recent trading update highlighted that it is delivering growth in line with its long-term target. As part of this, it is becoming increasingly efficient, while all of its regions contributed to improved financial performance in its latest set of full-year results.
The company’s wide geographic spread may reduce its overall risk. It could also produce stronger growth than many of its FTSE 100 index peers, since Diageo’s exposure to growing economies across the emerging world may act as a catalyst on its financial prospects.
Certainly, the stock is not cheap compared to the wider FTSE 100. It currently trades on a price-to-earnings (P/E) ratio of 22. However, its rating has been higher in the past, while its track record of growth suggests that with the global economic outlook being uncertain, the company’s defensive profile may lead to increasing demand among investors.
Diageo’s strategy of constantly innovating its products to adapt to changing consumer tastes has proven to be successful in the past. As such, its long-term growth outlook appears to be sound. It could outperform the FTSE 100 over the coming years.
The recent trading update from education specialist Pearson (LSE: PSON) was relatively disappointing. The company experienced weak sales in the US, which caused it to lower its guidance for the current year.
Despite this, the business is on track to deliver its planned £300m+ in annualised cost savings from the end of 2019 onwards. This could help to strengthen its competitive advantage, as well as improve profitability over the medium term.
Pearson continues to invest in new technology, such as its digital offering, in order to capitalise on faster-growing segments of its key markets. This may enhance its long-term growth prospects and lead to improving financial performance.
With the stock trading on a P/E ratio of 12, it seems to offer a wide margin of safety following recent share price weakness. This could signify a buying opportunity for patient investors who have a multi-year time horizon and are able overcome potential near-term volatility. It could lead to high returns in the coming years as the business delivers on its growth strategy.
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Peter Stephens owns shares of Diageo. The Motley Fool UK has recommended Diageo and Pearson. 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.