There are good reasons many famous investors look to buy businesses that enjoy high barriers to entry for competitors. After all, keeping out would-be rivals often brings premium pricing power, attractive margins and big shareholder returns.
This is absolutely the case with credit bureau Experian (LSE: EXPN). One of just a handful of big, globe-spanning credit bureaux, Experian earns operating margins of around 25%, kicks off prodigious cashflow and returns gobs of it to shareholders.
On the face of it, its dividend yield may look a bit miserly at 2%. However, dividends are only half of the story for the firm as it also spends essentially the same amount of cash on share buybacks. Indeed, in the three years through fiscal year 2017, Experian’s business generated some $3.1bn in free cashflow that primarily flowed directly to investors via $1.1bn in dividends and another $1.1bn in buybacks.
And on top of very healthy shareholder returns, Experian also offers quite impressive growth prospects. This is due mainly to two factors. The first is the nature of our economies, where credit is integral to life for individuals and businesses alike. With more and more data points to hoover up, analyse, and sell, Experian and its peers are finding more and more customers willing to shell out for increasingly accurate data.
The second means of growth is through expansion into new regions and the addition of related services. As far as geographic expansion goes, Experian’s main target has been Brazil, which is close to becoming its second biggest market by revenue with the region accounting for roughly 16% of sales in 2017.
And on top of solid mid-single-digit organic growth and pushing into new markets, Experian isn’t afraid to use its financial heft to buy up smaller companies and begin cross-selling these new services to its array of customers. This includes highly pertinent areas such as identity protection for consumers.
All together these helped boost Experian’s revenue by 8% year-on-year in Q3 with organic growth clocking in at 5%. With this level of growth, high levels of shareholder returns and non-cyclical nature, Experian looks like a great long-term buy to me even at its current valuation of 23 times 2018 earnings.
Insuring a bright future for investorsÂ
Another FTSE 100 growth and dividend star I’ve got my eye on is insurer Prudential (LSE: PRU). The group has been growing its dividend payouts by an average of 11.5% annually over the past five years and at today’s share price it kicks off a healthy 2.4% yield.
On top of this decent-but-fast-growing dividend, the group’s share price has been steadily rising as the insurer expands its highly profitable business in the US and reaps the rewards of its high exposure to increasingly wealthy Asian economies.
In the first half of 2017, the group’s operating profits rose 5% in constant exchange rates as US life insurance profits jumped 7% and Asian operations grew new business profits by a whopping 18%.
With management considering getting rid of low-growth UK operations to focus on faster-growing North American and Asian markets, a healthy and rising dividend and an attractive valuation of 17.6 times earnings, I reckon Prudential could be a great holding for the long term.