Buy-to-let investing has certain advantages over equities. It’s tangible, and you can see exactly what you own.
People are always going to need somewhere to live. And there’ll always be people who can’t afford or choose not to jump on the first rung of the property ladder and pay rent instead.
That’s why some people feel a lot more comfortable owning property than stocks. But those who focus solely on buy-to-let investing miss out on the many benefits of the stock market, including (but not limited to) diversification, tax-free profits, and exposure to some of the world’s best companies.
Unlike buy-to-let, where we have to do all of the work, with stock market investing, we can simply buy shares in a company, and the directors of that company and all of the employees then work for us. While I’m not shy of hard work, I certainly prefer others to do it for me if I don’t have to get stuck in myself!
That’s why I’d dump buy-to-let and buy this stock instead.
Rightmove is a cash generative machine
Rightmove (LSE: RMV) came to the stock market in 2006 and since that period the board and employees have worked their socks off for shareholders. Anyone who decided to take the IPO 14 years ago has seen their investment increase well over 15 times.
That’s a fantastic return for shareholders, and while the low hanging fruit may have been gathered already, the sheer amount of cash that Rightmove produces means that this stock may have further left to run.
Of the £87.45m in after-tax profit generated, the company produced cash flows from operations of £90.73m. This is not a business that turns a profit and fails to convert any of those profits into cash – it’s a business that churns out more cash than it makes in profit.
This is most likely due to positive relationships with suppliers. For example, if a company pays its suppliers on a 60-day term but is paid by its debtors on a 30-day term, it means the company collects its cash sooner than it has to pay cash out.
While many companies have tried to challenge Rightmove, so far no other competitor has been able to dislodge the company from top spot. The beauty of the business is that it has a scalable online platform, and estate agents pay the business to list properties. This in turn kicks in a positive self-reinforcing network effect; the more estate agents that list properties on the platform, the more potential house buyers will check the site out and drive traffic to the platform. More house buyers means more estate agents signing up!
One of the things we look for in buy-to-let is the rental yield and also what yield we are getting on our capital employed. Well, that metric also exists in investing too, with return on capital employed (ROCE) being used to measure a company’s return on the capital that it uses to invest in itself.
Rightmove has a three-digit percentage ROCE, and is clearly more effective than owning buy-to-let properties, in my view.
Michael Taylor has no position in Rightmove. The Motley Fool UK has recommended Rightmove. 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.