Growth investing

My approach was mainly due to the apparent simplicity of selecting value and income opportunities, especially in contrast to the complexity of successful growth investing. What makes a good value or income investment is often clear-cut and can be seen by looking at underlying fundamentals. On the other hand, a growth investment requires faith. I have to hope that the company’s performance will catch up and exceed the current share price.

Consequently, finding the right opportunity within the growth sphere can take time and effort. This sector is known for having much higher price-to-earnings (P/E) ratios, a lack of stable income, and sometimes an absence of profitability. Despite this, I can identify promising opportunities with strong underlying fundamentals by using a growth investing filter.

A prime example of what I am after is RELX (LSE: REL), a UK information and analytics business. The share price has performed surprisingly well following the pandemic. It gained 34% in 2021 and is down just 2.6% this year. Furthermore, the company has grown almost 300% in the last 10 years, consistently expanding each year.

Growth characteristics

When looking at analyst forecasts for RELX, it is clear why it would be considered a growth company. Turnover is forecast to rise by 16.9%, and underlying profit is set to increase by nearly 43%. This level of growth far exceeds the roughly 5%-10% generally associated with a value investment. Furthermore, earnings per share (EPS) have grown by 13% on average every year for the last decade, a very impressive level.

In addition to these core growth characteristics, the company has a set of very strong fundamentals. Profit margins are high, debt levels low, and the company is achieving significant cash flow generation above its three-year average. And RELX has significant efficiency in generating income from invested capital, a good indicator of quality.

However, it is trading at a P/E ratio of over 26, making it quite expensive in the current market. This could lead to the share price contracting further, as it is potentially overvalued. Additionally, growth has been slowing over the last few years, so the 13% average may not be achievable going forward.

Despite this, RELX has very encouraging underlying fundamentals and is a growth company I would be keen to invest in. Therefore I will watch the share and aim to add it to my portfolio going into 2023.

I’ve found this acts as a good form of diversification in addition to my portfolio’s expected growth and value investments.

In the past, I focused on picking companies that offer the highest dividend, thinking this was the only way to build a good income portfolio. But I’ve decided to consider a new approach to income investing that looks at companies that have paid and grown their dividends for many years. These companies may only offer a yield of 1%-2%. However, the goal of this approach is for this dividend yield to gradually increase over the years.

Ashtead Group

The first company on my list is Ashtead Group (LSE: AHT), a construction equipment rental giant. It operates in three key regions — the US, Canada, and the UK — with over 1000 rental locations worldwide. The stock currently offers a dividend of 1.5%, but is forecast to reach 1.8% in 2023.

This current yield isn’t the most impressive and is below the index average of 3.8%. However, the fact that it’s has been paid consistently for 17 years — and has grown for 16 — interests me. 

Ashtead’s underlying fundamentals are also strong, with good profit margins, efficient earnings generation from capital, and reasonably low debt levels. But it’s important to note that despite the share price falling 25%+ this year, it’s still trading at a price-to-earnings (P/E) ratio of 16.4. This could suggest the company is overvalued even with its quality fundamentals.

Nonetheless, I think the opportunity to access such a consistent dividend yield is worth paying a premium for. So I’m keen to watch Ashtead in 2023 and will consider adding it to my portfolio.

RELX

The second company on my list is RELX (LSE: REL), an information and analytics business based in the UK. The company currently has a dividend yield of 2.2%, forecast to increase to 2.3% next year.

Relx has paid a dividend consistently for three decades, which is why I consider it a good income-generating share. However, the yield is lower than many examples of dividend-focused investments.

That being said, the stock is currently trading at a P/E ratio of over 26, making it quite expensive in the current market. The current yield of 2.2% is once again below the average FTSE 350 yield, so it may not justify its expensive price.

Yet RELX has very encouraging underlying fundamentals, and the consistent yield may be worth paying a premium for. Therefore I’ll monitor RELX next year to determine whether I should add the company to my portfolio.

1. Consistently pays a dividend to its shareholders
2. Annually increases the size of the payout

There is no requirement for high yields. I assume the market is forward-looking. Investors might have driven a stock price down because they see trouble is on the horizon for the company. But that will also drive the trailing dividend yield higher. Thus, I could buy a stock just for its high yield and walk straight into a dividend cut.

The yields on my three FTSE 100 dividend aristocrat picks might seem uninspiring. But bear in mind that I am looking for companies to buy and hold in my Stocks and Shares ISA for years. I am looking for a great track record to give me confidence that dividends will be consistent and grow over time.

FTSE 100 dividend aristocrats

The first of my picks is the industrial engineering company Spirax-Sarco (LSE: SPX). It has increased its dividend per share (DPS) every year over the last decade. Over the last five fiscal years, payouts to Spirax shareholders have increased by 12% per year.

Spirax’s revenues and earnings have grown solidly over the last decade, driving dividends steadily higher. The company’s dividend payout ratio (DPR) — DPS divided by earnings per share (EPS) — has remained fairly stable at around 45% over the last half-decade. That speaks to a consistent dividend policy designed to pay out what the company can afford. This is all comforting. It suggests that if the company continues to perform as it has, I should see bigger cash flows into my ISA over time if I buy its shares now.

Diageo is another FTSE 100 dividend aristocrat with solid revenue and earnings growth and a consistently increasing dividend over the last decade. Aside from a very high reading in 2020, the DPR has remained at around 60% over the last five years. The company, which produces alcoholic beverages known the world over, like Johnnie Walker and Smirnoff, has increased its DPS by 4% annually on average over the last five years.

Finally, I like the look of Relx. This provider of research journals, databases, business intelligence, analytics services, and exhibitions has consistently paid a dividend to its shareholders for decades and increased it yearly over the last 10 years. Once again, I see solid revenue and earnings growth and a consistent DPR of about 60%.

Attractive dividend yields

A high dividend yield might not necessarily be attractive. Also, a low yield might not mean an investor like myself should turn away in horror. None of these three stocks has eyewatering yields: Spirax’s yield is 1.3% on a trailing 12-month basis, Relx’s is 2.3%, and Diageo comes in at 2.1%.

But let’s look at DPS instead. Spirax shareholders received a dividend of 136p per share in 2021. If Spirax continues to grow its payments at 12% a year, then after 10 years, the DPS will be 350p, and after 20, 1,088p, which would be a yield of 10% on a 10,620p per share investment in the stock made today. But, as always, there are no guarantees in investing, and I need to be confident that the future of these companies will look like the past before diving in.

Describing itself as “a global provider of information-based analytics”, RELX employs over 33,000 people and owns, amongst others, the Lexis Nexis brand, which provides software to help detect and prevent online fraud and money laundering, and ICIS (Independent Commodity Intelligence Services), which brings data, markets and customers together to create a “comprehensive, trusted view of global commodity markets”.

RELX reported a 2% increase in revenues to £7.3bn in 2021 and an impressive 20% increase in operating profit to £1.9bn.

This growth story has continued into 2022, with its half-year results showing a 16% rise in operating profit compared to the same period in 2021.

The returns to shareholders are also improving. RELX has declared a 10% increase in its interim dividend, and is more than halfway through a £500m share buyback programme, which is due to be completed this year.

The company is also on an acquisition spree and has bought six companies so far in 2022 for a combined consideration of £342m.

The share price is up 4.6% over the past two months and nearly 6% over the past year.

So has the time has come for me to become more acquainted with RELX and to make it a key component of my long-term portfolio?

I’m not so sure.

The price-to-earnings ratio is a lofty 30 and the dividend yield is not much over 2%. There seem to be better FTSE 100 bargains out there.

At 31 December, RELX had £113m of cash on its balance sheet but the company had to spend £920m on its dividend last year. Net debt (albeit falling) was 83% of annual revenue.

Underlying cash generation is good — more than twice that of the dividend — but with the continuing desire to grow through acquisition, the inevitable heavy capital expenditure required by a technology business and the ongoing share buy-back programme, there are many demands on the company’s surplus cash.

Maybe you have never heard of RELX because there is nothing much to say?

You wouldn’t think so if you read the 2021 annual report. The numbers don’t start until page 138 so there is plenty of the usual waffle. The word “risk” is mentioned 421 times and “compliance” features on 74 separate occasions. The annual report talks of its customer base (lawyers, insurance companies and governments), “near- frictionless identify verification” and “curated and connected” data solutions.

All this leads me to conclude that perhaps the real reason why you have never heard of RELX is because it’s a solid if unspectacular company. Dare I say it, a little boring.

But in these difficult times, maybe it’s time for me to become a little boring, shun the more famous members of the FTSE 100, and add RELX to my long-term portfolio?

After doing my research, I have decided to wait and see how RELX gets on during the second half of the year. The shares look over-valued to me, but the company is now on my radar and is no longer the mystery it once was.

UK prices have risen sharply in recent months and the Bank of England is now forecasting an eye-watering 7% inflation rate by spring 2022. That’s the fastest rise in prices in over 30 years.

In times of rising inflation there are several companies that could perform relatively well. I’d say those that demonstrate pricing power should outperform over the coming months and years. What I mean by that is the ability to pass on price rises to customers. For instance, they might have strong brands or sell sticky products where customer demand remains steady despite higher prices.

Best shares to buy now

In terms of pricing power, I reckon one of the best shares to buy for my Stocks and Shares ISA is technology giant Apple (NASDAQ:AAPL). Despite currently being the largest company in the world, it’s still managing to grow at pace. In fact, it recently reported that its total revenue jumped by 11% to $123.9bn.

As it has an army of loyal fans, it can easily raise prices without significantly affecting demand for its phones, laptops, and digital services.

The iPhone maker even managed to boost its gross profit margin to 44%, despite supply chain challenges that affected so many companies during the pandemic. However, more than half of Apple’s sales comes from its iPhones. Any slowdown in the smartphone market or changes in customers’ upgrade habits could have a material impact on sales growth. That being said, so far it has managed its challenges well and continues to be one of my top picks for the coming months and years.

Pricing power

Another quality company that has pricing power is Relx (LSE:REL). Previously known as Reed Elsevier, Relx is a FTSE 100 business with a market cap of £44bn. It may not be a household name, but that’s because it’s geared towards business customers. Relx is a global provider of analytics and decision tools for professionals. Its largest areas of focus are risk, scientific, medical, and legal sectors.

What I like about this business is its resilience and profitability. Relx offers relatively steady growth and strong cash flow generation. And because it has small, medium, and large customers in more than 180 countries, it offers great diversification. Lastly, its highly specialist tools and products mean that it should also have enough pricing power to keep up with rising costs.

Quality business

Relx does have an exhibitions business that suffered during the pandemic. That has been a drag on performance and may continue to do so if large events suffer any more disruption. Also, with a price-to-earnings ratio of 23, I’d say its valuation isn’t particularly cheap, although that is to be expected for a high-quality business.

Overall, I’d say it’s a good quality business that offers steady growth, pricing power, and even a small but reliable 2% dividend yield. Its last trading update was in October but I’m expecting another one soon where I’d like to see positive trends continue.

So if inflation is coming, why should I, as an investor in UK stocks and shares, worry? And if I should be worried about how inflation might affect my portfolio, is there anything I can do to lessen the harm?

Why should investors worry about inflation?

Inflation affects stock prices in general and also more specifically. 

The Bank of Englands’s Financial Policy Committee (FPC) is concerned that:

“Asset valuations could correct sharply if, for example, market participants re-evaluate the prospects for growth, inflation or interest rates.”

What the FPC is getting at is that low interest rates, robust growth, and modest but transient inflation are keeping stock markets buoyant as the world recovers from the Covid-19 pandemic. But, if inflation is persistent and gets out of hand, interest rates might have to rise to combat it. Rising rates will put the brakes on economic growth. The net effect is usually lower stock market valuations, or more explicitly, a stock market crash. But, a stock market crash will not affect all stocks equally. 

FTSE 100 stocks

Companies with low or negative earnings, with high expected revenue growth and whose best years are far in the future, are likely to be hit the hardest by a stock market crash precipitated by rising rates, inflation, and slow growth.

Suppose growth and small-cap stocks are likely to be hit the hardest by an inflationary environment. In that case, it is logical to conclude that large-cap stocks with established businesses should perform better. The FTSE 100, and possibly the upper end of the FTSE 250, is where I want to be looking for these types of stocks.

Can I narrow the search down further beyond large-cap mature stocks to try and reduce the effects of inflation on my portfolio’s value? I think I can. So far, I have focused on the systematic impacts of policy responses — rising rates and reducing monetary stimulus — to higher than expected inflation. But what about the effects of inflation itself?

What is so wrong with inflation? Are rising prices not suitable for businesses? Selling items for higher and prices sounds ideal. But, consider what happens if the cost of materials used to produce the items is also increasing. What if wage inflation is making products and services more expensive to produce?

If a business faces these cost pressures but does not increase its sales prices, gross and operating margins will contract. If a company can increase its prices to its customers, it might keep its margins. But what happens if customers won’t pay the inflated prices?

Inflation-busting stock criteria

What I need to be looking for are large-cap stocks with pricing power. I am looking for big, quality businesses with good track records and the following characteristics:

• Offers unique, non-homogenous, differentiated goods and services.
• Provides goods and services that are essential and used frequently.
• Goods and services overall take up a small percentage of customers’ spending.
• Ideally sells to other businesses rather than consumers.
• Digital delivery is a bonus but not essential.

There are problems in the labour market at the moment. But, the labour shortages appear to be concentrated in the transportation and storage sector. I might want to avoid this sector, as wage cost pressure will be highest here.

UK stocks and shares with pricing power

Relx (LSE:REL) and Halma (LSE:HLMA) seem to fit my criteria. They are both large-cap stocks in the FTSE 100 index. Both have posted positive earnings and paid a dividend for at least the last five years. That is a solid five-year track record. 

Relx is a provider of information-based analytics and decision tools for professional and business customers. The company also publishes journals, databases, and reference sources for scientific and medical researchers. These are services that companies really can’t do without, and they are delivered digitally, often on a subscription basis. 

Halma produces safety products and services for industrial and healthcare sector companies. Fire detection and suppression systems, for example, are things that businesses cannot easily cut back on: health and safety regulations see to that.

Neither company sells directly to consumers or at least keeps this to a minimum. Both sell mission-critical goods and services to businesses, and these are likely to consume a relatively small percentage of their customer’s total costs.

If inflation starts to bite

Naturally, if inflation is a concern and Relx and Halma are potential inflation beaters, other investors might be onto this already. Relx is trading at a price-to-earnings ratio of 22.5, and Halma shares are priced at a whopping 42.8 times trailing 12-month earnings. The average P/E ratio for the FTSE 100 is 15.8, so both shares could be considered pricey, but Halma especially so. 

Relx has a significant events business that closed during the pandemic. The closure caused Relx’s revenues to fall in 2020. The events business is still not back up to speed and might never recover fully, as it relies on a good deal of international travel.

Halma is a manufacturer. It will need to source components and might find its operations hampered if the current disruption to global supply chains continues. Halma is also known to grow through bolt-on acquisitions. Although its balance sheet is solid, deals usually require financing. If rates are rising to combat inflation, that would make Halma’s deals potentially more expensive and hamper its growth.

Even with these risks, I believe that Halma and Relx are both stocks with the potential to outperform the FTSE 100 if inflation does start to bite. I will keep both on my watch list.

FTSE 100 growth stocks 

The first stock is credit rating agency Experian (LSE: EXPN). This firm has an edge in the financial data market. It provides credit rating information for millions of consumers and financial services companies.

This is a business where reputation matters. Experian has been building its reputation over the past few decades, as well as its vast bank of data. It would be virtually impossible for a competitor to create the same kind of competitive advantage in a limited amount of time. 

The London Stock Exchange (LSE: LSEG) has a similar competitive advantage. It is known worldwide for being one of the globe’s top stock exchange operators. It also owns a significant stake in the European clearing and financial data markets.

In both of these markets, scale matters. The firm’s customers want access to a wide range of information, and the FTSE 100 group can provide that. Many other organisations cannot. At the same time, clearing is a high-volume, low-margin market. Only large companies have the economies of scale to make this business profitable. 

Relx (LSE: REL) also has a scale advantage. Its businesses provide scientific, technical, medical and legal information as well as analytics. Customers will only pay for these services if they have the whole picture. No one would bother if the company only had a limited volume of information available on its platforms. This is its advantage. The FTSE 100 firm’s scale also helps draw in data, which only reinforces its competitive advantage. 

As long as all of these companies continue to invest in their products and services and do not take their growth for granted, they should remain data champions. That is why I would buy all three FTSE 100 stocks for my portfolio today, although these are not risk-free investments.

Significant challenges

The most significant challenge all three organisations face is data security. The number of cyber attacks on companies around the world is growing exponentially. Firms with extensive data collections are valuable targets.

Indeed, a few years ago, Experian’s US peer Equifax suffered a significant data breach. It was fined by regulators and had to compensate consumers. If any one of the three companies outlined above suffered the same fate, it might have a significant financial and reputational impact on the business. It could also significantly impair their competitive advantage. 

As such, while I am positive on the outlook for all three to companies, I will remain alert to the threat of cyber attacks against the businesses. 

Safe stocks, or defensives as they are often called, are companies whose products and services are in demand even during difficult times. Like the kind we saw last year. This makes them good to buy and hold for the long term because they grow my capital over time while protecting against stock market crashes. 

Rentokil Initial is a big FTSE 100 gainer today

There are two such stocks that I want to highlight here. The first is the pest control provider and hygienist Rentokil Initial (LSE: RTO). Its share price is up 6.6%, making it the biggest FTSE 100 gainer as I write, after it released healthy results for the first half of 2021. Its revenues are up 13.3% and net profit is up 54.5% from the same time last year. A weak base from last year’s pandemic setback has contributed to the high growth. 

At the same time, I think it is essential to note that the numbers do show recovery from the worst of the pandemic. The company expects to continue growing for the rest of the year as well, even though revenue from disinfection can slow down as the pandemic loosens its grip on the world. 

What’s next for the share price

Even though its share price has lost some of its momentum since the stock market rally of November last year, it has managed to stay quite elevated. Also, it has gone on an acquisition drive in the first half of the year, completing 24 across various parts of the world. While I like its ambition to expand further, it remains to be seen whether these will pay off. 

On the whole, I like the stock. But because it is pricey, I will still wait for dips before buying more of the stock. 

Results paint a mixed picture for Relx

Information and analytics provider Relx (LSE: REL) is another safe growth stock that released its results for the first half of 2021 today. They paint a mixed picture, with a 3% decline in revenue compared to last year, though it shows a 4% increase on a constant exchange rate basis. 

Similarly, its reported net profits are up 21% but the adjusted number is up only 2%. On the whole though, I think its results are more good than bad. Investors are happy with its results too, evident in a 3.3% increase in its share price. 

Much to like

Like Rentokil Initial, it too has made acquisitions this year, completing five “small acquisitions”. And its outlook is positive too. It expects its performance in terms of revenue, operating profit, and earnings per share to be “slightly above historical trends”. Relx’s long-term share price trend is encouraging as well. It is a buy for me.

Market-leading FTSE 100 stocks

The first stock on my list is Relx (LSE: REL). The global provider of information-based analytics and decision tools is one of the few data-driven businesses in the FTSE 100. Its focus on data has helped the firm overcome the worst of the pandemic. 

According to the company’s latest trading update, management expects the group’s three largest divisions — Scientific, Technical & Medical (STM), Risk, and Legal — to deliver another year of underlying revenue and adjusted operating profit growth in 2021.

Unfortunately, one part of the FTSE 100 business holding back growth is its Exhibitions division. This accounted for 5% of revenue in 2020, and it continues to be significantly impacted by the pandemic.

Management is unsure when this part of the group will see a recovery, but with Exhibitions only making up tiny percentage of revenues, I’m not too concerned. If the other parts of the business continued to expand, they’ll make up the difference in a couple of years. 

The data business is all about scale. The more information a company has, the more significant its competitive advantage. Relx owns the rights to a vast amount of data, which is why I’d buy the the business for my portfolio today. 

However, owning data comes with some challenges. Primarily, the company will have to make sure its security is always up to scratch. A cybersecurity breach could lead to hefty fines and may jeopardise its reputation. This is probably the most considerable risk the group faces today. 

Retail champion

JD Sports (LSE: JD) is one of the UK’s greatest retail success stories. Founded in 1981 in Manchester, the group now has around 3,300 stores globally. 

JD’s earnings have understandably taken a hit with the group’s physical locations subject to various closures throughout the pandemic. However, management is expecting a rebound this year. In its financial year ending 1 February 2020, JD’s pre-tax profit totalled £349m.

According to the company’s latest trading update, it’s on track to deliver pre-tax profit for its current financial year of “no less than” £550m.

I think these numbers show the company’s potential and highlight its competitive advantages. Retail is incredibly competitive, and many other retailers are currently struggling to adapt to the new normal and the world of e-commerce. 

It looks to me as if JD has managed this transition incredibly well. Still, I’m aware the company’s success shouldn’t be taken for granted. Retailers’ fortunes can change overnight, so this enterprise might not be suitable for all investors. 

Nonetheless, even after taking this risk into account, I’d buy the FTSE 100 stock for my portfolio right now. 

A top UK share for July

With interim results around the corner I think RELX (LSE: RLX) is a top stock to buy. The FTSE 100 information supplier is scheduled to release half-year results on Thursday, 29 July.

In its last update in April RELX advised that its Scientific, Technical & Medical (or STM), Risk and Legal divisions “have started the year well.” These units account for almost all revenues, the company’s Exhibitions arm accounting for just 5% of the remainder. This means that this UK media share shouldn’t be significantly impacted by a delayed recovery here as Covid-19 restrictions remain in place.

Data and analytics are becoming more and more important to companies as the world becomes increasingly digitalised. I think this makes RELX a great long-term buy. It’s worth recalling that the FTSE 100 share has been extremely busy on the M&A front of late (it spent almost £880m on 11 acquisitions in 2020). While this has the potential to supercharge earnings growth, it also carries huge risks if said acquisitions fail to deliver desired earnings projections and throw up unexpected costs.

City analysts think RELX will report annual earnings growth of 9% in 2021 and 14% in 2022. This does leave the company trading on a chunky forward price-to-earnings (P/E) ratio of 23 times. A reading like this leaves the UK share in danger of a sharp share price reversal if trading conditions worsen.

Another FTSE 100 stock on my radar

St James’s Place (LSE: STJ) is another top FTSE 100 stock whose share price I think could surge next month. The wealth management giant is set to unveil first-half financials on Wednesday, 28 July.

The St James’s Place share price has risen 55% over the past year. It reached fresh record peaks in the aftermath of its last trading update in late May, too. Then it said that “the strong new business activity we experienced in March has continued into the second quarter”. As a consequence of improving market confidence and high savings levels, it said gross inflows between January and June were likely to be around 23% higher year-on-year.

I expect St James’s Place to advise that trading has remained since. And this could lead to further share price gains. However, like RELX, the FTSE 100 business commands a handsome valuation (a forward P/E ratio of 25 times). This could cause a price retracement if news here disappoints. What’s more, trading at the wealth manager could deteriorate if fears over the global economic recovery grow as inflationary concerns rise and the Covid-19 crisis rolls on.

That said, at the moment I think the earnings outlook at St James’s Place still looks mightily encouraging. Indeed, City analysts think annual earnings here will rise 22% and 19% in 2021 and 2022 respectively.