While record low interest rates have attracted the attention of investors into high dividend-paying stocks, it’s important not to forget the exceptional capital growth that many companies have to offer. During the past 114 years the ASX has provided investors with an average compounded return of 12%, with dividends reinvested of course, and it’s therefore important to have a balance of both growth and dividends in your portfolio.
A company’s ability to sustain these solid growth rates depends primarily on their long-term prospects and here are three companies that I think offer very attractive growth prospects, at a reasonable price.
1. M2 Group
Telecommunication provider M2 Group Ltd (ASX: MTU) is the owner of well known brands such as Dodo and Eftel. M2 has recently given shareholders much to smile about, gaining almost 25% in the last month. But if you’ve missed out on all the action, don’t worry, because there might be plenty more growth to come.
M2’s strong share price primarily follows the outstanding FY14 results it delivered, with net profit growing a whopping 60% from last year. Furthermore, M2’s main ingredient for success in the past few years has been its strategic acquisitions of quality companies like Dodo. It’s now also entering the lucrative energy industry which gives it the perfect opportunity to replicate its telco success.
Despite recent gains, M2 trades on a cheap price-to-earnings ratio of 14, while also offering a 3.5% fully franked dividend yield. I think M2 is the perfect candidate to provide investors with long-term growth
2. Bentham IMF
Litigation funder Bentham IMF Ltd’s (ASX: IMF) success depends solely on its ability to seek out and fund cases with high success rates. With a 96% average win rate over the past 12 years (from 155 cases), Bentham has a competitive advantage that is extremely hard to replicate.
Also, the funding of its international ventures, particularly in the UK and Netherlands, offers Bentham greater exposure to a thriving market, as well as a more dominant position in the global litigation market.
Despite achieving a massive 41% increase in earnings per share in FY14, investors were not too happy about the potential introduction of new legislation, governing how much litigation funders receive from case wins, causing a sharp fall in its share price.
But I think, its recent price weakness offers investors a great opportunity to purchase a quality growth company at a discounted price. To complement its growth endeavours, Bentham also offers a tasty 5% fully franked dividend yield, to amplify your capital gains even further.
Data analytics firm Veda Group Ltd (ASX: VED) is a leading provider of credit information and analysis in Australia and New Zealand and is another great example of a company with resilient competitive advantages.
Veda holds an extremely strong market position given the volume of data it has collected over a long period of time. As of now, Veda holds data on more than 20 million people and 5.7 million businesses. This makes it the one-stop shop for businesses looking to gather credit information, making it very hard for new entrants to threaten its market position.
In its most recent annual report, Veda achieved a modest 12.4% increase in revenues from FY13 and a stunning 141.5% increase in net profit after tax. These results add even more credibility to its impeccable track-record of growing revenues every year since FY1993.
Although it may trade on a relatively hefty price-to-earnings ratio of 30, I think Veda’s future growth endeavours fully justify its price. Although some investors may prefer to wait for a more attractive entry point.