The best returns over the long term for shareholders are created by businesses that grow their profits strongly for multiple years.
There's a number of different factors that combine to make a good performing company such as good management, the business being in a good industry and it having a competitive advantage over rivals alongside a reliable balance sheet.
Here are three of the best businesses on the ASX in my opinion:
NIB Holdings Limited (ASX: NHF)
NIB is the second-largest private health insurer listed on the ASX with a market capitalisation of $2 billion.
Its shares have grown by 219% over the last five years and I think there's more growth to come. It's steadily increasing its market share of the private health insurance industry whilst increasing premiums too.
In FY16 it grew policyholders by 19,501 and started a commercial arrangement with Qantas called Qantas Assure.
It's currently trading at 19.3x FY17's estimated earnings with a grossed up dividend yield of 4.56%.
Challenger Ltd (ASX: CGF)
Challenger is the annuity specialist and has a market capitalisation of $6.4 billion.
The number of baby boomers entering retirement is steadily increasing each year and they will want to provide a safe and reliable retirement for themselves.
Financial advisers in their droves are suggesting their clients take up an annuity. Over 90% of advisors and 60% of consumers are now aware of Challenger and that it's the leader in retirement income. Annuity sales grew by 45% in the second half of FY16.
If the government ever makes it mandatory for retirees to turn part or all of their superannuation into an income product then that would significantly boost Challenger.
It's trading at 16.8x FY17's estimated earnings with a grossed up dividend yield of 4.15%.
Bapcor is Australia's leading auto parts provider with a market capitalisation of $1.5 billion.
It owns a number of auto brands such as Burson Auto Parts, autobarn, Midas and ABS. By having businesses spread across the automotive chain, it benefits from economies of scale and can offer services to businesses and individuals alike.
Bapcor has defensive attribute as in good times drivers will usually want to service their cars. In downturns people want to hang onto their car longer, which means they are willing to buy the spare parts to fix their car when needed.
The worry for various car-related businesses is the rise of automated cars, but I don't think this will affect Bapcor – parts will still break and need to be replaced whether the driver is automated or not. The supplier that has the biggest economies of scale (which is Bapcor) can offer the best value to customers.
Bapcor is trading at 31x FY16's earnings with a grossed up dividend yield of 2.83%.
Foolish takeaway
All three of these companies are high quality and all of them are definitely worth an investment.
At the current prices my order of preference would be Challenger followed by NIB Holdings and finally Bapcor. If you're after a quality growth stock with a bigger dividend than the three above, you should check out our number one dividend pick for 2017.
