12 promising growth stocks for 2014
Ferreting out growth or income stocks for a diversified long-term portfolio is not as simple as finding companies that have grown profits or make bigger payouts than average. Academic studies show very little correlation between past growth and the future. Growth persists for decades in some companies, but they are the exception.
The majority of growing companies succumb to recession, competition or strategic short-sightedness. Growth companies also attract higher prices in the stockmarket, which confusingly makes them poor investments as a group.
Companies that pay generous dividends tend to have a better record, but it's ambivalent. A high dividend yield may be indicative of a generous dividend policy – but it may result from a low share price that betrays doubts about whether a company can afford to continue paying the dividend.
For sustained growth, or sustained income, at a reasonable price, investors must look beyond growth rates and dividend yields to profitability, which is the engine of long-term growth, and value, which deter- mines an investor's return.
By relating a company's profit to the value of the capital it has invested – its profitability – we know it is investing wisely. Highly profitable companies will continue to grow and pay dividends.
As share prices rise, value has become a scarce commodity. However, opportunities exist to buy shares in businesses facing short-term challenges that shouldn't undermine their long-term profit or dividend growth prospects.
Shares with more speculative prices often have better prospects, but must justify their heady valuations with long-term dividend and profit growth.
In terms of its price earnings (p/e) ratio, MS International is the cheapest of our 12 selections. The engineer is struggling to come to terms with shifting naval budgets.
Although it has diversified, for example, into manufacturing petrol station super-structures, its biggest business makes naval gun systems and other military equipment. While the other businesses have good prospects, overall profits fell sharply in the year to April 2013, and the company does not expect revenues to grow for a second successive year.
But MS International is still comfortably profitable and cash-rich, and the company has not cut a dividend since 1995. It should remain a high-yielder.
Although Castings' dividend yield is only slightly above average, the strength of the company almost guarantees the dividend will be paid. That's all the more surprising considering the business Castings is in. It forges iron castings, primarily for European commercial vehicle manufacturers.
Although demand virtually dried up during the credit crunch and profitability slumped within the industry, Castings remained profitable and maintained its dividend, partly because of its reputation and relationships with customers, and partly because of the company's strong finances.
Castings remains a stalwart, capable of prospering through future shocks.
Smoke alarm manufacturer Sprue Aegis has only been paying a dividend since 2009, but its credentials as a dividend stock are bolstered by its growth prospects.
Highly profitable and without debt, Sprue Aegis has recently become the sole supplier to B&Q, British Gas and Baxi, and it's launching a range of trade products it believes are technically superior and cheaper to manufacture than rival products that it already distributes.
The company is listed on the ICAP exchange but intends to list on the Alternative Investment Market (Aim). If it does, the shares should attract a wider following, which, combined with the prospect of profit growth, suggests capital gains as well as income.
Vinyl flooring manufacturer James Halstead has raised its dividend every year since 1993, remaining consistently profitable and financially strong. Although flooring is a commodity and customers are heavily influenced by price, the com- pany has grown by manufacturing and distributing its products efficiently, and innovating solutions to technical problems for specific situations.
Although the shares are a little pricey, the dividend at this cash-rich and prudent company should be very safe.
Committed to long-term sustainable growth, Unilever, with a market capitalisation of £32 billion, owns 13 brands that each earn more than $1 billion (£610 million) a year in revenues.
It's reduced the dividend only once in the past two decades – in 2009. The owner of Magnum, Flora, Lifebuoy, Surf, Omo, Persil and Comfort, among other superbrands, is an international powerhouse selling everyday products that people buy whatever the economic situation.
The shares aren't obviously cheap, but for the long-term investor buying for income they could still be a good investment.
The trade-off between quality and value is an imprecise one, and although XP Power is a little pricey, the shares may well be worth it.
The company, which makes power converters for manufacturers of industrial, medical, computing, telecommunications and broadcasting equipment, has only paid a dividend since 2008, but like Sprue Aegis, its growth credentials underpin the promise of more.
Since it transformed itself from a distributor of power supplies to a manufacturer, it has earned high returns on capital despite the economic circumstances, suggesting it has a future as a stalwart capable of sustained dividends.
Cohort specialises in communications and data management systems mostly for the defence sector, but also for education, space, and transport. Although Cohort has experienced falling demand for consulting because of reduced spending by the Ministry of Defence, the group has continued to grow. Despite the withdrawal from Iraq and Afghanistan, electronic warfare is still a priority and Cohort is winning contracts on long-term programmes, while exploiting non-military opportunities.
Originally a pig feed producer, Cranswick has grown and diversified since the 1970s, partly through acquisition. Today it supplies processed and fresh sausages, bacon, pork, gammon, ham, pastries such as sausages rolls, and a growing range of non-pig based foods. Its most significant customers are retailers, which it supplies with branded foods and their own ranges, including Sainsbury Taste the Difference and Tesco Finest.
In the year to March 2014 growth is likely to be muted by the high price of pigs, but Cranswick has demonstrated over the years that despite the buying power of supermarkets, there is money to be made supplying them.
Ricardo is an engineering consultancy that improves the efficiency of vehicles and power generation equipment. It supplies electric and hybrid vehicle technologies, for example downsized engines, vehicle 'light-weighting' and the incorporation of energy storage systems (flywheels). Although profitability dipped marginally during the recession, demand for Ricardo's products and services remained strong.
Its strategy - to develop technology that meets increasingly strict emissions regulations and reduces the impact of high fuel prices, and in addition to diversify geographically and into new sectors – promises steady growth at a reasonable current share price.
On a p/e ratio of 82, online fashion retailer Asos is at the far end of the speculative spectrum. It already has a near £5 billion market capitalisation that would, were it not listed on Aim, put it comfortably in the FTSE 100.
Asos is a major force in UK and Australian fashion, and has plans to expand globally, becoming an Amazon.com for clothes. If it can continue growing profits at its recent rate of about 30% a year for more than a decade, it might live up to expectations. Very few companies do that.
Dunelm has been a retail success story during the most hostile period for retailers in recent memory. Competition from the internet and giant supermarket chains has not hindered the company, which has accelerated profit growth through the recession.
Dunelm sells curtains, duvets, pillows, mirrors, small items of furniture and preposterously large bean bags at prices pitched for slightly austere times.
Profit has taken off in recent years as Xaar has developed its printhead technology and applied it to new markets, most successfully the printing of ceramic tiles. The company manufactures digital printheads for industrial printer manufacturers, often targeting industries yet to convert from analogue to digital and thereby creating a market for itself.
Once the market is established, rivals will move in - so Xaar must stay one step ahead. The rate of innovation, a harbinger of growth, shows no sign of slowing.
This feature was written for our sister publication Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.