When looking for stocks to buy we concentrate on how much cash they make and how much we’re paying to put them in our portfolio. We appraise cash flow rather than accounting profit because it represents a return more secure than promises by customers to pay later. It is also harder for companies to manipulate.
Businesses with healthy cash flow have the flexibility to repay their debts when they come due, reinvest in their businesses to create future profits, and pay dividends to shareholders. And as for valuation, the price you pay is one of the main determinants of your long-term returns.
While the past decade has not been kind to the UK stock market, we remain enthused about its prospects. Valuations are highly attractive, especially relative to other markets, and the country is still home to many high-quality businesses capable of producing good returns and rising dividends. The following are three companies we own that fit our key criteria and offer attractive and growing dividends.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Three UK stocks to energise your portfolio
National Grid (LSE: NG) was once regarded as a dull but worthy high-yielder. Now the owner of energy networks in the UK and north-eastern US is also something of a growth stock. The company has announced an extraordinary £60 billion investment plan to upgrade its infrastructure to cope with the power system’s shift from fossil fuels to renewable generation.
With thousands of miles of both offshore and onshore cables to be laid in the UK alone, the challenge is great. However, the prize of set, regulated returns on an asset base growing at 10% each year is highly attractive. Importantly, with a prospective dividend yield of 4.8%, rising with inflation, income investors haven’t been forgotten as the UK rushes towards “clean power by 2030”.
UK food retail is another area that rarely sets pulses racing, but we believe that the competitive position of the UK’s biggest supermarket, Tesco (LSE: TSCO), is better than it has been for some time. Rivals Asda and Wm Morrison, saddled with debt by their private equity owners, have been bleeding market share in recent years.
Similarly, the once formidable German discounters, Aldi and Lidl, are now more focused on profitability than gaining market share and opening new stores.
In addition, with over 23 million UK households (82%) in possession of a Tesco Clubcard, the company has incredible insight into consumer spending habits. In time, this should offer a new avenue for improving profit margins. While the surprise increase in employment costs announced in the Budget is clearly unhelpful for bricks-and-mortar retailers, we don’t think it will destabilise the firm’s strong fundamentals.
Assura (LSE: AGR), which owns and develops GP surgeries and private hospitals, is on the front line when it comes to delivering the much-needed upgrade to the UK’s healthcare estate. The Darzi Report into the state of the NHS noted that “the primary care estate is plainly not fit for purpose”, with 20% of GP surgeries predating the NHS itself, and too little of the budget being spent in the community. These findings play neatly into Assura’s plan to develop modern, purpose-built, community-based, primary-care facilities.
Recognising the problem isn’t the same as delivering the solution. More political willpower and firepower may be needed. However, demographic headwinds mean the challenges confronting the NHS are unlikely to diminish.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Barclays begins paying up to £100 compensation to customers after banking outageBarclays will pay up to £7.5 million in compensation to customers after its banking services were disrupted by an IT outage
-
Review: Shangri-La Paris – an ode to the world’s best foodNatasha Langan enjoys fine French and Chinese cuisine at the Shangri-La Paris
-
The star small and mid-cap stocks income investors have overlookedOpinion Thomas Moore, senior investment director, Aberdeen, highlights three company stocks as he shares where he would put his money
-
Falling revenues and mounting debt spell trouble for Jumia TechnologiesStruggling African e-commerce platform Jumia Technologies looks headed for the exit, says Dr Matthew Partridge.
-
Chemring Group: an explosive investment opportunity in defenceEuropean states are raising their military spending, and Chemring Group looks well placed to profit
-
Best of British bargains: cash in on undervalued companies in the UK stock marketOpinion Michael Field, Chief Equity Market Strategist, EMEA, Morningstar, selects three attractive UK stocks where he'd put his money
-
PZ Cussons share price down 75% in last decade – why it's one to watchOpinion Once-strong consumer-goods business PZ Cussons is out of favour with the market. That spells opportunity for investors, says Jamie Ward
-
Cash in on the biotech sector with specialist trust BioPharmaOpinion BioPharma has an attractive niche in lending to asset-rich biotechnology companies
-
Three top-notch Taiwanese companies cashing in on the advent of AIOpinion Eric Chan, investment director and co-manager of the Aberdeen Asian Income Fund, highlights three potential Taiwanese winners in the technology industry
-
Find tomorrow’s Asian giants while they are still smaller companiesOpinion Nitin Bajaj, portfolio manager of the Fidelity Asian Values trust, picks three Asian companies to invest in.
