Halma (LSE: HLMA) might not be the most exciting company in the FTSE 100, but its growth over the past few years speaks for itself. Since 2013, revenue has risen at a compound annual rate of 12% and net profit has marched higher by 11% per annum.
This steady earnings growth has translated into impressive returns for investors. Over the past decade, the stock has produced a total return of 23% per annum.
Built for growth
Halma’s business model lends itself to growth. The company is actually a group of businesses that make products for hazard detection and life protection. Demand for these products is relatively steady so Halma’s main avenue for growth is acquisitions. The firm has proven itself to be exceptionally capable at buying smaller players and integrating them into the larger group.
For example, today the business announced the acquisition of Business Marketers Group Inc, trading as Rath Communications, for $42.4m or £32.6m. Rath fits perfectly into Halma’s stable of businesses. It provides emergency communication systems for Areas of Refuge (buildings designed to hold occupants during a fire or emergency when evacuation is not possible) in the US.
I’m generally cautious about recommending companies that pursue a buy-and-build strategy, because it is easy for businesses to become caught up in the excitement of acquisitions, stray from their core competencies and borrow too much money. This is a recipe for disaster. However, Halma seems to be executing the strategy with precision. It is only buying health and safety-related companies, and net debt is relatively low at only 21% of shareholder equity.
With this being the case, I think it can continue to report double-digit earnings growth for the foreseeable future and in my opinion, is a perfect growth investment for any portfolio.
Special income
Halma looks to me to be a fantastic growth investment but I would buy InterContinental Hotels (LSE: IHG) for income.
It has a history of returning all of its excess funds from operations to investors. The latest capital return is a $500m special dividend that will be paid out to investors at the end of January. These cash returns mean investors have seen a total return of 22.7% per annum from the stock over the past decade.
Can this continue? I think it is highly likely that it can. City analysts are expecting the company to report a slight increase in earnings per share over the next two years, which will increase the amount of capital the business has to distribute to investors. Dividend growth of 16% is predicted for 2018 and 12% for 2019. This will leave the stock yielding 2.5%, although that excludes any special dividends that might be distributed in the meantime.
Historically, the group has generated between $400m and $500m in free cash flow every year before the payment of dividends. And as long as the business continues to throw off all of this excess capital (barring a severe economic recession I see no reason why it can’t) investors should be able to continue to reap the rewards.