When it comes to the ‘perfect investment’ each investor has different criteria.
Personally, I’m looking to generate long-term wealth through my ISA and as such, I aim to invest in high quality companies that have a strong track record of generating shareholder wealth over time. I look for companies that are leaders in their fields, have geographically diversified revenue streams, strong balance sheets and a history of revenue, earnings and dividend growth.
With that criteria in mind, here are two I believe could make excellent ISA investments.
Diageo
Drinks manufacturer Diageo (LSE: DGE) is a classic ‘Warren Buffett’ type stock to my mind. The maker of Johnnie Walker and Smirnoff is an easy company to understand, sells recession-proof products globally, and is a leader in its field with a strong record of generating shareholder wealth. Furthermore, with significant emerging markets exposure, there’s a long term growth story at play, as the growing incomes and aspirational nature of consumers in these regions should help drive revenue up. It’s little wonder Diageo is such a popular investment with both UK and US investors.
It enjoyed a strong period of growth in the five years between FY2008 and FY2013, with revenues climbing from £8,090m in 2008 to £11,303m five years later. However the last three financial years have been more subdued as sluggish emerging market growth and ‘anti-extravagance’ measures in China have put the brakes on. The company reported revenue of £10,485m for FY2016, down 3% on the previous year, however the good news is that city analysts forecast revenues to continue growing in the near future with consensus revenue estimates of £11,710m and £12,242m for the next two years.
The company paid shareholders dividends of 59p per share for FY2016, a yield of 2.8% at the current share price and analysts expect dividends to grow, with consensus estimates of 63p and 66p for FY2017 and FY2018. It’s worth noting that the dividend has grown at a rate of 8% over the last five years, easily outpacing inflation.
Diageo has enjoyed strong share price momentum since the Brexit vote as investors have rushed to defensive stocks with global earnings. The rise has pushed the P/E ratio to 20.6 times next year’s earnings which, while not an outrageous figure, isn’t cheap. I believe Diageo could make an excellent ISA investment, but I’ll be waiting for a more opportunistic entry point before buying.
Prudential
Insurer Prudential (LSE: PRU) on the other hand, is a quality stock that is trading at an attractive valuation. Why? The insurance sector is out of favour right now due to regulation concerns and Brexit uncertainties, and as such Prudential can be bought for just 11.6 times next year’s earnings.Â
The company has a diversified revenue stream, with significant operations in Asia, the US and UK, and provides 24m customers with protection and savings opportunities.
Earnings have more than doubled in the last five years and dividend growth has been excellent at over 14% growth per year in this time. While city analysts anticipate earnings dipping slightly from £1.24 per share in FY2015 to £1.17 for FY2016, they forecast growth to resume in FY2017 with earnings of £1.30.
Prudential is a classic example of a high quality company trading an at attractive price and for investors looking for capital and dividend growth, I believe Prudential could be a good long-term pick.