If you’ve got some cash to start investing but aren’t sure where to begin, I’d suggest buying FTSE 100 shares. Choose well and these large, profitable businesses can provide steady returns for years, without any drama.
Although the outlook is uncertain due to Covid-19 and the risk of a global recession, the companies I’ve chosen provide essential services. They’ve also shown that they can adapt to changing markets. I reckon that over long periods, it should be safe and profitable to be invested in these stocks.
FTSE 100 share #1: Sage Group
My first pick is FTSE 100 share Sage Group (LSE: SGE), which makes accounting software. This business is one of the UK’s rare technology stars — it joined the stock market in 1989 and is now a £7.4bn business with revenues of nearly £2bn per year.
It seems to be a law of nature that tax and accounting rules only ever become more complicated. Services like those provided by Sage will only become more essential in the future, in my view.
Although Sage faces competition from rival start-ups, I think it has two big advantages. The first is that Sage already has a large market share. Most of these customers now pay for services using recurring subscriptions, rather than one-off purchases. During the first half of this year, 88% of Sage’s £935m revenue came from recurring subscriptions.
For a business, recurring subscriptions are wonderful as they provide guaranteed consistent cash flows and excellent forward visibility.
Sage’s second big advantage is that accounting systems can be complex to use and are often linked to many aspects of the business. Customers are generally reluctant to change to new systems if the one they’re using works well.
Sage shares aren’t cheap. But this business enjoys profit margins of about 20% and a big share of the market. At current levels, the shares trade on about 25 times forecast earnings, with a dividend yield of 2.5%. I see this as a stock you could buy today and forget about for 10 years.
Mondi: efficient packaging
The second FTSE 100 share I want to talk about is packaging group Mondi (LSE: MNDI). Like Sage, this business has a big market share and a good range of modern products. Increasingly, the firm’s range is focused on paper-based products that are sustainable and can be fully recycled.
Mondi says that it’s seen strong demand in areas such as food, hygiene and e-commerce this year. Demand for industrial and construction-related products has been weaker, but I don’t see this as a long-term concern.
The firm’s finances look solid to me despite this year’s disruption and I’m also encouraged by recent director share dealing. Chief executive Andrew King bought £224,400 worth of shares on 29 June, at a price of around 1,496p.
The share price is still at the same level today, putting the shares on 14 times 2020 forecast earnings. Historically, Mondi has paid generous dividends. Although the payout is suspended at the moment, broker forecasts suggest a payout of 70p next year. This would give a dividend yield of 4.3%.
I think this is a great level at which to buy this FTSE 100 share for a long-term portfolio. As with Sage, I’m confident Mondi is a stock you could buy today and hold for many years.