This (tax) year I have been putting together some companies that I think are high quality, and are suitable for a LTBH (Long Term Buy and Hold). The selection criteria are:
- ROCE5 (5-year mean ROCE) >=15%
- Debt < 3 * PBT (Profit before tax)
- Yield >= 2.5%
- PE < 20
- CAGR of dividends at least 5.5%, as reported by Stockopedia
It is very much a “dividend growth” strategy. I am willing to accept a lower dividend than typical “dividend stocks” if it means the company has good returns on capital, and I expect the company to expand. So it will have no utilities, or companies like VOD (Vodafone), which have meagre returns on capital and are loaded with debt.
Here’s some of the companies I like and own:
DPLM – Diploma
A conglomerate, which is usually a dirty word, but its share price has risen 373% over the last decade. It has net cash, so it has not been squandering money foolishly.
IGG – IG Group
Anyone who invests has probably heard of this company. It has branched out into stockbroking. I recently joined it as a customer, and I like its platform. It has a dividend yield of 3.7%.
PAY – Paypoint
PAY provides transaction processing and settlement at shops and on mobile. Its dividends have grown 12% annually over the last few years, and the current yield is 5.1%.
XPP – XP Power
It is a Singapore-based company providing power supplies to the industrial, healthcare and technology sectors. Usually I would groan at the mere mention of Asian stocks, but XPP is not some Chinese AIM junk.
Here are some other companies that I own that are perhaps not quite up there with the list above, but which are still pretty good:
CGS – Castings
It’s an iron casting and machining company. It sounds very boring, but its return on capital has averaged 17.3%, and its dividends have increased at a rate of 5.9%. Yield is around 3%, and trades on a PE of 12.9. It has net cash.
IMT – Imperial Tobacco
Makes ciggies. It carries a fair amount of debt, which is why it’s not in my top tier. It is in a defensive industry, so I am reasonably sanguine about the debt levels.
NXT – Next
A retailer that needs no introduction. Management truly are a class act. It is quite large, and does not have the growth opportunities as perhaps some of the other companies do, but it does have a yield over 5%.
PZC – PZ Cussons
Cussons, as in the famous brand of soap. It is a family-owned business, and one in which Lord Lee said he was happy to buy. PE of near 15 is hardly excessive, and it has a yield over 3%. Its mean ROCE is just shy of 15%, and it has been growing dividends at 6.3%. It took on some debt last year to increase growth. That can be a warning sign, although in PZC’s case I’m reasonably confident that they will invest wisely, as opposed to going on a debt-fuelled expansion binge. We might need to be forgiving about subsequent ROCE levels, as the returns may take some time to feed through. It’s probably viewed as a bit of a stodgy company, but with sales of “only” £819m, it has a long way to go before it reaches the size of, say, Unliver.
Some other good companies that I don’t own which I think are very good but perhaps a little pricey, or I just haven’t gotten around to buying:
HLMA – Halma
It makes security products. Sounds boring, but it has great returns on capital. Its share price has increased 349% over the last decade. There’s nothing boring about that.
RTN – Restaurant Group
A restaurant chain. I owned some shares a few years ago, but sold them. Silly me.
ULVR – Unilever
Everyone knows Unilever.
VCT – Victrex
Manufactures “polymer solutions”. Dividends have increased 13.4% annually over the last few years. It has net cash.
A couple of other companies that perhaps don’t meet the standards above, maybe don’t have much in the way of dividends, etc:
DTG – Dart Group
Anyone who reads Stockopedia must surely have heard of this airline and logistics company by now. It’s in a cyclical industry, which may put a lot of people off. It has actually been growing steadily for a number of years. The management seem very canny.
TAST – Tasty
Restaurant chain run by the Kaye family with a good track record in the business. Not exactly cheap, but I’m well in the money on this one, and want to let it ride.
Are there any more that should be added to the list? Not Vodafone, or other lumbering Footsie giant that is past its prime.