Most readers will be familiar with the 12 days of Christmas song. Today, I'm proposing 13 stocks for the remaining 13 business days prior to Christmas — and no partridge in a pear tree.
The Australian Financial Review (AFR) has recognized what most investors want when they buy shares in a company: exposure to a business that is on a firm financial footing, has a history of steady earnings growth and reasonable prospects – all at a reasonable price.
They embarked upon a detailed analysis to arrive at a short list of 13 businesses that have the steadiest earnings profile over the past 10 years. Steady shouldn't be confused with slow. The median annual earnings per share (EPS) growth for the 13 stock stocks is 19, compounded over the past seven years.
The methodology
To narrow the field, every top 300 company on the Australian Stock Exchange was ranked according to stability of earnings, operating income and dividends paid. It is incorrect to assume that reliable earners must come from the ASX top 50 stocks, when one considers names such as Mermaid Marine (ASX: MRM), Silver Chef (ASX: SIV), Carsales.com (ASX: CRZ), and Corporate Travel Management (ASX: CTD).
Exceptions were made for the latter two names, which have less than a decade of earnings history (eight and five years respectively), but have been included as they score very highly. Also Mondelphous (ASX: MND) has been excluded as the mining services sector is deemed destined for a prolonged tough time. However, Mermaid Marine was retained for its special qualities and ranked as the second most reliable earner of the 13.
The main selection criterion is the earnings per share stability score. A score approaching 1 indicates the next period's EPS is almost perfectly predictable based on past results. The second criterion is the stability of both income and dividends.
The Results
1. Predictables
Woolworths (ASX: WOW) and CSL (ASX: CSL) are in a sense predictable, but to re-iterate, the median annual earnings per share (EPS) growth for the 13 stock stocks is 19, compounded over the past seven years. The return on equity (ROE) averages 22%. Carsales.com (ASX: CRZ) and REA Group (ASX: REA) lead the way with seven-year compound annual EPS growth of 42.2% and 42.7% respectively.
2. Retailers
Despite lower consumer patterns that appear both cyclical and structural, ARB Corporation (ASX: ARB) is most likely the company outside the ASX Top 50 with the greatest results in terms of both share price performance and dividends. JB Hi-Fi (ASX: JBH) is also included in the top 13 with a 90% share surge this year.
3. Finding value
Most of the 13 have been recognized and rewarded over the past year, which has resulted in elevated price-to-earnings ratios, which average 20 against the wider market of around 14 to 15. Woolworths shares appear to represent value with a PE of 17.
A PE to growth (PEG) ratio has also been calculated to counter the rapid growth of some of the 13 stocks. This provides a guide for the value of a business based on expected long-term EPS growth. On this measure, Carsales, REA Group and Super Retail Group (ASX: SUL) look to be the best value.
Foolish takeaway
In my opinion, the above ranking system is revealing and suitable for investors with a medium to long term investment philosophy.
For those left wondering, the remaining three stocks not mentioned above that made up the most reliable earners on the ASX were Commonwealth Bank (ASX: CBA), Ramsay Health Care (ASX: RHC) and the New Zealand-listed Sky Network TV.
