Companies that provide a unique product or service that cannot be copied tend to be the best investments. Having a unique product gives businesses pricing power, which means they can charge what they like (up to a point).
These companies usually have fat profit margins and report high returns on invested capital (a measure of profitability for every £1 invested in the operation).
The London Stock Exchange (LSE: LSE) is one of these institutions. As well as being the operator of London’s stock market, the company also owns stock markets around Europe. Further, it is a major force in the clearing market across the continent.
Crucial business
Clearing isn’t a particularly exciting or high-growth industry, but it is a vital one. It is essentially the plumbing of the financial markets.
Clearing houses make sure all parties settle trades on time with the correct money paid for the deal. Without them, the financial markets would be a very different place altogether.
The fact that the LSE has such a big hold over European financial markets makes it a top-quality stock. Indeed, the stock has been one of the best performing shares in the FTSE 100 over the past decade.
A £1,000 investment in the company 10 years ago is worth £14,000 today.
It doesn’t look as if the group is planning to settle down any time soon either. It is currently progressing with the acquisition of data giant Refinitiv.
This $26bn deal will give the LSE a foothold in another major market, financial data. It already has a presence in the financial data market, providing figures for index providers, but this deal will be a tremendous boost for the data division.
Continued growth
With a robust presence in virtually every segment of the European financial markets, the LSE group is unlikely to be dethroned from its position. This suggests that shareholders should continue to be rewarded for owning a slice of this world-leading business.
Barring a significant setback, such as a cyber attack or collapse of one of the LSE’s major business divisions, group earnings should continue to grow at least in line with inflation over the long term as management uses the company’s position in the market to increase prices.
On top of this, the organisation is likely to make further additional acquisitions to complement organic growth.
A price-to-earnings (P/E) ratio of 38, at the time of writing, reflects the LSE’s prospects. It also reflects the fact that earnings per share are on track to grow by more than 30% over the next two years.
This could be a taste of things to come. Over the past six years, earnings per share have grown threefold. A repeat of this performance over the next six could see the stock triple from current levels. In addition to this capital growth potential, shares in the LSE also support a dividend yield of 1%.