I’ve been looking at some of the most popular big-cap shares on the London market and asking the question, “How will they fare in 2014 and beyond?” This article names the three FTSE 100 companies that I think possess the most attractive prospects for investors in terms of total returns.
To arrive at the final three I eliminated as much cyclicality as possible, which meant out with the financials, the insurance companies, the commodity firms and retail shares. Out also went shares where investors mainly rely on dividend income for a return, so no utilities, supermarkets, tobacco producers or big pharmaceutical companies.
The result is three firms with robust immediate earnings-growth prospects generated by a firm and well-defended market position. These shares have potential to reward investors with both capital gains and a rising dividend yield in the years to come.
The fast-moving semi-conductor industry
First up is ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US).  The firm licenses its technology to leading semiconductor manufacturers who incorporate ARM’s chip designs alongside their own technology to create smart, energy-efficient chips suitable for modern electronic devices such as smartphones. That’s an attractive business model; ARM has secured a strongly defended economic position at the heart of today’s fast-moving semi-conductor industry, which is driven by the mass-consumer appetite for digital communications devices.
The CEO reckons that demand for ARM’s high-performance, low-power technology offering is increasing thanks to the expanding popularity of inter-device connectivity. Margins are high and the growth outlook is robust. City analysts expect earnings to grow 19% in 2014 and 25% in 2015.
ARM operates in a strong market and has a durable position within that market, which manifests in stout margins and persistent double-digit earnings growth.
Region-specific beer brands on a global scale
Second is brewer SABMiller (LSE: SAB). The firm has an impressive record of rising cash flow and earnings, which it owes to the strength of its drink brands such as Miller Lite, Castle and Grolsch. The firm’s strategy is to keep its regional brands market-specific: it doesn’t try to square-peg one brand globally as do some other drinks distributors. That approach works; SABMiller is one of the world’s leading brewers with more than 200 beer-brands and some 70,000 employees in over 75 countries.
Like it or not, alcohol consumption is addictive and users rarely become uncommitted to repeat buying. If SABMiller can attract brand loyalty, as it seems to, there’s a good trading foundation upon which to build further growth. City analysts expect 10% earnings-growth for the year ending March 2015 and 11% the year after that.
SABMiller operates in an attractive sector and is has well-established consumer brands, all of which leads to robust cash flow and steady growth in earnings.
Consumer-brand driven emerging-market growth
The third company is consumer-goods provider Unilever (LSE: ULVR) (NYSE: UL.US), which is driving growth in emerging markets. Powerful brands can attract brand loyalty. When the goods are consumable, repeat purchasing can lead to strong, dependable cash flow. Unilever’s well-known offerings include names such as Lipton, Wall’s, Knorr, Hellman’s, Omo, Ben & Jerry’s, Pond’s, Lux, Cif, Sunsilk, Sunlight, Flora, Bertolli, Domestos, Comfort, Radox and Surf. That list shows the firm’s activities stretch across the food, personal- and home-care markets.
The firm saw high single-digit sales growth from its emerging-markets business last year, which accounts for more than 50% of all the company’s turnover. Although emerging-market growth has weakened very recently, the longer-term opportunity remains exciting with potential for Unilever’s goods to penetrate large, population-dense regions of the world.
Forecasters predict 8% earnings-growth during 2015. Unilever’s operations generate a dependable and rising cash stream, which looks set to reward investors going forward.
What about the price?
At first glance, the valuations of each of these firms look high. However, we are shopping in the metaphorical luxury car showroom now and don’t expect such high-performance models to carry a lowly price tag. Why should they? Take ARM, for example. Why should ARM’s forward P/E rating of 29 be any lower for 2017 than it is for 2015 as long as the forward earnings growth remains in the 20% to 40% range?
One way of reconciling a value strategy with a growth objective is to buy on share-price weakness, such as now, perhaps. One way of mitigating risk is to invest in stages, building to a full position as your returns prove your investment thesis.