Capital gains from FTSE 100 shares are looking good right now. Because of last year’s slump, there is a strong base effect at work when share price increases are calculated. This can make it harder to figure out the real performers. So I am now considering longer-term returns to get a better sense of promising stocks.
Based on this calculation, FTSE 100 investment company 3i (LSE: III) is one stock that I think could grow my investment significantly over the next five years. Over the past year alone, its share price is up 40%. It is a strong number in itself, but may look smaller than gains for many other stocks. However, that is only because it bounced back faster after last year’s crash. It was back to pre-pandemic levels, even before the stock market rally started last November.
3i posts good results
This is for good reason. Its investment returns were £1.7bn on opening shareholder funds for the year ending March 31, an increase of 22% from the year before. Its private equity business showed strong growth of 30%, while the infrastructure segment also showed healthy growth of 16%. The company’s returns were buoyed because of its investments in e-commerce, discount retailers, and health and hygiene companies, which accelerated during the pandemic.
It is confident that it is “well positioned” for the next year as well, despite continued global economic uncertainty. I think the cross-geographical nature of the company’s investments also work in its favour right now, when there is uneven growth across country economies.
Decent dividend yield
For a growth stock, I also like that it pays a decent dividend. Its current dividend yield is 3.1% and in a positive for income investors, it intends to either maintain or grow dividends every year.
Can it maintain its returns?
Despite the buoyant results though, I am cautious of whether 3i will be able to maintain its returns. The year before, it had shown a far more muted 3% return on shareholders’ funds.
Further, drilling into the nitty gritties of its returns reveals that in 2021, 3i got a fillip from its investment in Action, a Dutch value-for-money retailer with operations across seven European countries, including France, Germany and Italy. It saw a healthy 10% revenue growth last year, and plans to roll out 300 stores this year. This investment alone increased the value of its investments by over £1bn. Reliance on one company to generate future returns can be a risky proposition, in my view.
My takeaway for the FTSE 100 stock
That said, I cannot overlook 3i’s strong performance over the years either. Especially since stock markets are likely to stay strong and the economy is expected to take off now, I think it may indeed be positioned to perform well.
Even if economic weakness continues, its diversified private equity investments, may make continued gains. I would also keep an eye out for infrastructure policies that can be positive for its funds.
On balance, I think even with fluctuations in its returns, it is quite likely that 3i will deliver strong returns to shareholders. It is a buy for me.