Thinking about buying your first shares? Great!
When starting out investing, companies with easy to understand businesses, a history of growing earnings and strong returns on equity generally have a lower risk profile than young upstarts. Dividends are also a good way to get into the habit of compounding your returns.
CSL Limited (ASX: CSL) is a big, well established company which produces life-saving blood products and vaccines.
Is it a good starting point for beginner investors?
Is it easy to understand?
The core business of CSL is easy enough to understand; the company takes plasma from donor centres around the world and transforms it into special products which support antibodies or help blood to clot. CSL also manufactures various vaccines and anti-venoms.
CSL's revenues can be sorted into five product categories which I've summarised here.
Does it have a history of positive, growing earnings?
Companies with positive, growing earnings histories usually have an established customer base and growing demand.
CSL has a history dating back 100 years so is reasonably mature. The company has grown sales revenue at a rate of around 6% per year over the last five years and produces a healthy profit. Both trends appear most likely to continue in the near future.
What about strong returns?
CSL ticks this box with ease, producing a huge 48% return on equity in the 2016 financial year, well ahead of the 10% average for U.S. healthcare product companies. The huge return is in part driven by CSL's use of debt to leverage up returns, but also its large volumes.
Dividends
I love dividends because they make you consciously think about the next step in the investing process – reinvesting your returns.
CSL pays a regular dividend which has grown along with earnings over the last five years. This has been supported by a $1 billion share buyback program which increases the value of the remaining outstanding shares.
Foolish takeaway
CSL has several great characteristics for investors starting out their journey, especially its history of growing sales revenues, strong returns and paying out part of its earnings in dividends.
The company may be unlikely to break any records for growth over the next few years, but I feel it would be a solid, lower risk company to consider for new investors.
