The commonly held belief is to generate outstanding returns, we need to look for companies who are heavily innovative, with an incredible concept, which are run by a visionary CEO. I don’t believe this is the case. It is definitely true in certain examples, but despite the rush of investors looking for the next big thing, I just don’t buy it. It’s this seductive search for the lottery ticket type winners which pushes share prices to unsustainable levels, often in companies with little or no earnings, who have got little going for it except a good story. The problem for…
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The commonly held belief is to generate outstanding returns, we need to look for companies who are heavily innovative, with an incredible concept, which are run by a visionary CEO.
I don’t believe this is the case. It is definitely true in certain examples, but despite the rush of investors looking for the next big thing, I just don’t buy it.
It’s this seductive search for the lottery ticket type winners which pushes share prices to unsustainable levels, often in companies with little or no earnings, who have got little going for it except a good story. The problem for investors is, excitement doesn’t equal returns.
Because of their boring nature, some businesses can actually generate above-average returns, partly due to the fact that they’re overlooked by investors who are looking for something more exciting.
Here’s a great example of a boring company which has compounded wealth at an incredible rate for shareholders…
Credit Corp Group Limited (ASX: CCP)
For those unfamiliar, Credit Corp is a debt collection company. Essentially, it buys consumer and small business debt from organisations and then goes about the business of collecting that debt. The company has also expanded its debt purchasing to the US and provides consumer lending here in Australia.
It purchases distressed debt from Australian banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), as well as other finance groups and telecommunications companies like Telstra Corporation Ltd (ASX: TLS).
The organisations are happy because they can rid themselves of a problem (bad debt) and receive a small payment for it, without dedicating their own resources to a task that they’re likely not specialised in.
Because it’s Credit Corp’s core business, it is very good at judging the value of cash retrievable and paying less than is required to buy that outstanding debt. It makes a profit on what it pays for the debt, and what it can recoup. And it’s very good at it!
Over the last 10 years, Credit Corp has grown earnings-per-share by 27% per annum and increased its return on equity from 8% to 24%. For income investors, the dividend has increased by 12% per annum over the last 5 years, and 36% per annum over 10 years (the dividend was cut dramatically during the GFC).
The total shareholder return has been 45% per annum over the last decade. Yes, you read that right. This means a $1,000 investment would have turned into approximately $41,000.
Admittedly, that’s coming off a low base because we have the GFC as a starting point. I don’t think anyone would expect that level of growth to continue. And of course, this is hardly a slam dunk going forward.
There are risks. Organisations may decide to try their hand at retrieving the debt themselves to save money. Or the price they’re willing to sell the debt for is unattractive to Credit Corp. There’s also the possibility that Credit Corp may start getting its estimates wrong and pay too much for the debt while retrieving too little. In short, there are a few ways it could go bad.
The company is certainly not facing those issues at the moment, with its most recent figures showing NPAT (net profit after tax) growing by 17% and earnings-per-share growing by 16%.
Even now, Credit Corp is not trading at an expensive valuation, around 17 times earnings. The dividend yield is 3% fully franked.
This clearly shows that even one of the most boring companies can deliver some outstanding returns for shareholders. You don’t need some pie-in-the-sky concept or idea which takes off to get a great return.
I’m sure lottery ticket style ‘investing’ will always remain popular, but I’d rather stick to companies with proven business-models generating real cash flow today, to help build my wealth.
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Motley Fool contributor Dave Gow has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.