LONDON -- I recently got chatting with a friend whose endowment policy had matured. He was looking for a new home for the proceeds. I've been thinking about what I would do in his position.
As Warren Buffett famously said, the first rule in investing is not to lose money. In choosing the shares below, I've avoided highly rated stocks that could fall out of favor. This means rejecting companies that could progress significantly; instead, finding stocks that I consider unlikely to suffer large declines. Any sensible investor builds a diversified portfolio and I have picked companies from different sectors.
Here is the lowdown on my five shares for the next five years.
Forecast EPS Growth
|Prudential (LSE: PRU.L )||805||3.3||11.5||20.5%||20,669|
|Sportingbet (LSE: SBT.L )||33.75||5.0||9.1||(32.5%)||227|
|Royal Bank of Scotland (LSE: RBS.L )||221.8||0.0||11.0||N/A*||13,405|
|Wynnstay Group (LSE: WYN.L )||400||2.1||11.7||8.9%||66|
|Morrison Supermarkets (LSE: MRW.L )||284||4.2||10.3||5.6%||6,959|
*Royal Bank of Scotland is expected to move from a loss into profit.
Prudential is a FTSE 100 international insurance company. The shares today trade near an all-time high.
Prudential still has reasonable fundamentals. Furthermore, I believe that the company is set to exploit its fast-growing markets to dramatically increase profits.
In the last six years, Prudential has increased its dividend year-on-year by an average of 8% per annum. In that time, earnings per share (EPS) has nearly doubled. The shares trade on a historic yield of 3.1% and 13.9 times profits.
The company's recent interim results reported substantial growth in Prudential's Asian business. For the first half, Asia contributed 35% of group operating profit. The Asian operations delivered a 21% increase in profit and a 20% increase in cash contribution.
Prudential is expected to report an increase in EPS of 20.5% for the full year. This puts the shares on just 11.5 times forecast 2012 earnings.
Sportingbet is an online betting operator with a strong position in the fast-growing Australian market.
The online gambling sector carries substantial regulatory risk. Sportingbet has suffered from this in the past. In 2006, the company was forced to exit the U.S. market and pay a large fine to the U.S. Department of Justice. Earlier this year, regulators demanded millions of pounds from the industry before distributing licenses to operate in Spain.
While Sportingbet's largest European markets of Spain and Greece are struggling, Australia recently delivered 24% growth in a year. Australia now represents the majority of Sportingbet's earnings.
Australian regulators are considering permitting in-play betting and online poker. This would significantly increase Sportingbet's profits. Analysts expect a 20.2% increase in EPS for 2013. A recent trading statement from Sportingbet confirmed trading for 2012 was in line with expectations. Consensus for 2012 is 3.75 pence EPS with a dividend of 1.7 pence.
3. Royal Bank of Scotland
Royal Bank of Scotland recently reported results for the first six months of the year.
RBS' net asset value per share was reported at 489 pence. This is well ahead of today's share price. Normally, the market reserves such discounts for companies that are going backward. Yet there are real signs that RBS has turned a corner.
The bank's Tier 1 Capital Ratio improved to 11.1%. Before the worst of the financial crisis it was just 4%. Short-term borrowing fell to 62 billion pounds from 80 billion pounds the year before. Around the time of Lehman Brothers' collapse, short-term borrowing at RBS was nearly 300 billion pounds.
RBS is expected to deliver 19.3 pence of EPS for 2012, rising to 34.8 pence for 2013. Profitable companies should not trade at such great discounts to their asset values. If RBS can demonstrate sustained profitability I expect that discount will reduce significantly.
4. Wynnstay Group
Wynnstay Group's sales, profit and dividend record is hard to beat.
The lion's share of Wynnstay's sales come from supplying farmers with livestock feed and arable supplies such as fertilizer and seed. As the country has become less able to feed itself, U.K. farmers are securing higher prices for their produce. In turn, this benefits a supplier like Wynnstay. This structural advantage has delivered huge growth.
In June, Wynnstay reported that sales in the six months to the end of April 2012 were 18% ahead of last year. Earnings per share were up 14% and the interim dividend was increased by another 10%. Despite this strong first-half showing, analysts are forecasting a rise in EPS for the year of just 8.9%.
Wynnstay's dividend has increased year-on-year for eight years. The current share price seems undemanding. Wynnstay is a successful company that is enjoying favorable industry conditions.
5. Morrison Supermarkets
Last year, Morrison reported 11.2% growth in EPS and an 11.5% dividend raise. This is expected to be followed by a 5.6% earnings increase for 2013 and another double-digit dividend hike.
The U.K.'s supermarkets have been excellent long-term investments. For a company with earnings quality like Morrison I would not be surprised to see a price-to-earnings (P/E) ratio between 13 and 15. If growth is delivered, investors could profit from a double-whammy. Increased earnings would naturally see the share price rise and a change in perception would result in a higher P/E. For example, if Morrison were to be priced at 13 times the 2014 earnings estimate, the shares would be 40% higher than they are today.
Add in the sizable (and growing) dividend, and the company looks a good hold.
If you like to invest in companies for the long term then you might learn something from Warren Buffett, one of the greatest living investors. Recently he has been buying shares in a British company. To find out which one download our free report "The One UK Share Warren Buffett Loves". This report is 100% free and will be delivered to your inbox immediately.
Where is the U.K.'s leading dividend stock-picker investing today? The identities of Neil Woodford's favorite blue chips are revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
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- The One UK Share Warren Buffett Loves
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