Three companies to buy that will conquer the competition

Professional investor James Harries of the Securities Trust of Scotland picks three long-term investments that should sustain high returns on capital employed.

The Securities Trust of Scotland invests in a portfolio of high-quality and resilient businesses that we expect to compound free cash flow reliably over the long term. This should provide a growing income stream that forms part of the balance of income and capital growth. The aim is to produce an above-average return with below-average volatility. With this approach we hope to establish the trust as the high-quality, conservatively managed global equity income trust in the sector.

In a further effort to protect investors from undue volatility, especially those who have irreplaceable capital and a need for income, we have a discount-control mechanism in place. This keeps the share price close to net asset value (NAV) and provides liquidity for shareholders. 

At Troy Asset Management we concentrate our portfolios in sectors that can sustain high returns on capital employed (a key gauge of profitability) owing to the competitive advantages that some companies enjoy. With low turnover and correspondingly long holding periods we want to invest in businesses that we can leave to compound over ten years or more. Three such sectors are consumer staples, exchanges and information technology.

A crowd favourite

Consumer-staples companies are excellent businesses. Strong brands, scale, depth of distribution and longevity all breed familiarity and make for powerful competitive advantages. While best known for its eponymous carbonated soft-drink brand, PepsiCo (Nasdaq: PEP) is actually predominantly a snack business. 

With a dominant position in the US and growth opportunities overseas it is a wonderful company. Most of its products are impulse buys at checkouts, which allows the company to raise prices without affecting demand – especially useful in these more inflationary times.

A hedge against inflation

Formally called the Chicago Mercantile Exchange, CME (Nasdaq: CME) owns and trades some of the most important and liquid futures contracts in the world, including those on interest rates, Treasuries and commodities. 

Investors’ need to hedge the risks associated with inflation and rising interest rates has benefited the company. Greater volatility in commodity markets also drives activity across the exchange. Limited capital requirements allow CME to pay an attractive and growing dividend. It is very well placed for the uncertain times in which we currently live.

The profits in payrolls

Within information technology (IT) we have exposure to enterprise IT expenditure, which we expect to be more resilient and predictable than household spending in this area. Paychex (Nasdaq: PAYX) was originally a payroll firm, but is now a leading provider of payroll, human capital management and insurance serving US small and medium-sized enterprises. 

It boasts 710,000 clients and pays one in 12 private sector workers in the US. Despite its scale, the opportunity to penetrate this market further means the company has plenty of future growth potential. The attractive economics Paychex enjoys allow it to pay a decent and growing dividend, which we think it can sustain for years to come.

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