I love investing in S&P/ASX 200 Index (ASX: XJO) shares with long-term growth potential. Compounding is a very powerful force that helps our portfolios grow over time.
I understand why investors like the large ASX bank shares for their dividend income, but I don't think they have a lot of earnings growth potential. The more earnings can grow, the more likely it is that share price growth can occur.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Soul Pattinson is one of my favourite ASX 200 shares because of the diversification it offers and the way it invests.
It's invested in a number of different sectors and ASX shares. The business is invested in resources, telecommunications, property, agriculture, swimming schools, financial services and so on.
Some of its biggest ASX shares include New Hope Corporation Ltd (ASX: NHC), TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW), Tuas Ltd (ASX: TUA), Pengana Capital Group Ltd (ASX: PCG), BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA).
In its own words, this is how the company invests:
Our formula is to invest in like-minded, profitable businesses with defendable cash flows. We invest in public, private, and real assets, and we always have cash ready to take advantage of opportunities – particularly in periods of market volatility.
Our business model enables us to be patient in growing our existing investments, and nimble when opportunities emerge. This supports our objective to deliver both capital and income growth for shareholders over the long-term.
I think the business is set up to perform well in the long term, even if the economy isn't doing well.
One of the most appealing things to me is that the ASX 200 share has grown its dividend every year since 2000. It is steadily investing in more opportunities for its portfolio, which helps it grow even further over time.
Johns Lyng Group Ltd (ASX: JLG)
The company describes itself as an integrated building services group that provides building and restoration services across Australia and the US. Its core activity is rebuilding and restoring a variety of properties and contents after they've been damaged by insured events, including impact, weather and fire events.
It has a wide variety of (potential) customers including major insurance companies, commercial enterprises, local and state governments, body corporates and owners' corporations, and retail customers.
The business is seeing significant growth in the catastrophe space. FY23 saw the company's catastrophe-related revenue soar 125.3% to $371.3 million, with the company's overall revenue growing 43.2% to $1.28 billion.
I also like the company's moves to diversify geographically (it recently expanded into New Zealand). It's expanding into additional areas that are more defensive and consistent, while also giving the possibility of synergies with the main business. I'm talking about strata/body corporate management services, as well as gas, fire, smoke alarm and electrical testing and compliance.
In five years, I think the ASX 200 share could be in more countries, have a greater market share of catastrophe work, and have a larger market share of those additional services in Australia.
According to Commsec, the company is valued at 31 times FY24's estimated earnings.
