My best investment in my relatively short time investing has been Altium Limited (ASX: ALU) where I’m up 10 times my money.
Perhaps I was lucky to invest in Altium, but there were a few things I looked out for with Altium that helped me choose it several years ago.
A growth theme that makes sense
I think any business that you invest in needs to have a growth story that makes sense. I like finding a theme where you can see long-term growth and also find a business that has the potential to be a national, regional or global market leader.
With Altium, I was a big believer in the growth of the internet of things where there will be more devices requiring more complex engineering and software to enable them to do what their makers want them to do. That trend has continued to develop since I invested in Altium and it looks like that’ll keep happening over the next decade (and beyond?).
There’s an obvious growth trend towards data moving to data centres with huge providers like AWS, Azure and Google Cloud. That’s the growth trend that Nextdc Ltd (ASX: NXT) and Megaport Ltd (ASX: MP1) are building on.
Goodman Group (ASX: GMG) is benefiting from the large shift to e-commerce and major investments in logistics. There are also plenty of smaller ASX shares that are benefiting from a continuing shift to e-commerce including Redbubble Ltd (ASX: RBL), Kogan.com Ltd (ASX: KGN) and Temple & Webster Group Ltd (ASX: TPW).
Rising profit margins
It’s good to be able to see a path for growing revenue for a business. But for me, what turns a business into a true long-term performer is the ability to keep growing profit margins over time so that profit can rise even faster than revenue.
During the 2010s, Altium displayed great scalability and it has increased its earnings before interest, tax, depreciation and amortisation (EBITDA) margin to around 40% now.
I think further profit margin growth will be possible in FY22 and onwards as Altium grows towards clear market leadership and keeps winning new subscribers.
There are several other ASX shares with rising profit margins that I think are definitely worth watching like Redbubble, Pushpay Holdings Ltd (ASX: PPH), Xero Limited (ASX: XRO), REA Group Limited (ASX: REA) and CSL Limited (ASX: CSL).
The profitability of a business is ultimately what will (or should) determine the share price of a business like Altium, or any other business.
A commitment to returns for shareholders
The reason any investor should be interested in a public company is the potential returns. That can mean the capital growth of the share price as well as cash returns paid to shareholders.
Altium could easily be a business that just holds onto all of its cash to re-invest it. And that would be okay because it’d be re-investing into high-returning activities. We’ve seen businesses like Berkshire Hathaway, Amazon, Xero and A2 Milk Company Ltd (ASX: A2M) do great great things by re-investing profits and cashflow back into their business. The commitment to shareholders here is by incrementally growing the business and not making any dangerous moves with debt or risky acquisitions that could permanently destroy shareholder capital.
But I think it’s great just receiving a tangible return from your investment each year in the form of a dividend. Share prices are constantly changing, but dividends can provide certain returns.
Altium has been growing its dividend consecutively for several years. It has a stated goal of growing the dividend. There are plenty of other businesses with a good commitment to shareholder returns like Wesfarmers Ltd (ASX: WES), Brickworks Limited (ASX: BKW) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
This combination of being a quality business, with a good growth theme and being committed to doing the best by shareholders can lead to very good returns over the long-term. That’s why Altium has turned out so well for my portfolio so far. I’m keeping my eye out for other investments that could also deliver really good returns.