LONDON -- Using a collection of criteria such as returns on capital employed and the free cash flow to asset ratio, I have attempted to identify the highest-quality companies on the market today. Here are three of the biggest qualifiers.
Clothing retailer NEXT (LSE:NXT) is fast growing profits from its online operations. Growth from web sales contributed nearly all the profit growth produced last year.
In the last five years, NEXT has grown dividends per share at an average rate of 13.8% a year. In that time, earnings have been rising by an average of 12.1% a year. NEXT is forecast to increase earnings and dividends for the next two years, at an expected rate between 7% and 11% per year.
What makes NEXT's achievements so notable is the fact that in recent years, sales growth has been modest. Fortunately for value seekers, the shares trade on a 2013 P/E of 13.9 -- that's less than the average FTSE 100 stock.
2. Reed Elsevier
Reed Elsevier (LSE:REL) (NYSE:RELX) is a provider of "professional information solutions." Products include leading industry journals -- Reed Elsevier is publisher of both The Lancet and Gray's Anatomy.
The recurring revenues provided by many of the company's products underpin its ability to reward investors. In the last five years, dividends at the company have been increased by around 50%. Annual sales growth in that period has been a modest average of 3.6% a year. This has not stopped profit growth, however. Since 2008, reported net profits at Reed Elsevier have more than doubled.
Two years of earnings and dividend growth are forecast. This puts Reed Elsevier on a 2014 P/E of 13.1, with an expected yield of 3.5%.
3. Hargreaves Lansdown
As Hargreaves Lansdown (LSE:HL) has grown, its economies of scale have enabled it to become even more profitable. Last year, the company reported a net profit of 131 million pounds on 266 million pounds of sales. Five years ago, before the financial crisis, the company made 17 million pounds from revenues of 99 million pounds.
Part of the reason for this impressive record is the fact that many of Hargreaves Lansdown's sales deliver recurring revenue (such as commissions on fund sales). This additional revenue is added at little cost to the company, meaning that profitability is ratcheted higher.
More massive growth is forecast for both earnings and dividends at the company. EPS (earnings per share) for 2014 is forecast to reach 37.1 pence per share, almost 50% ahead of the figure achieved for 2012.
Identifying and backing quality companies is the cornerstone of Warren Buffett's investment success. This billionaire super-stock picker has recently been buying shares in a different FTSE 100 company. To find out which one and the price he paid, get the free Motley Fool report "The One U.K. Share Warren Buffett Loves." This report is totally free and will be delivered immediately. Just click here to start reading today.
David O'Hara does not own shares of any of the above companies. The Motley Fool owns shares of Hargreaves Lansdown. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.