From 6 April we get another ISA allowance of £15,240, and that’s a tax-free investment opportunity worth grabbing.
Leading with quality
I’m looking for firms that can pay a reliable and growing stream of dividends in the years to come. If the company has a good quality business with strong positive cash flow, capital growth should follow. Expanding dividend payments and a rising share price is a double win that should drive pleasing total returns.
Once I’ve identified a quality firm, it goes on my watch list waiting for a sensible entry point, perhaps during a period of market weakness, or when some temporary issue knocks the firm’s share price.
Today’s focus is on ARM Holdings (LSE: ARM), Unilever (LSE: ULVR), Shire (LSE: SHP) and Whitbread (LSE: WTB).
Defensive qualities
These firms attract because of their defensive qualities. ARM occupies a strong position in consumer electronics by designing microchips for devices such as the iPhone. Many original equipment manufacturers use ARM intellectual property and its licensing arrangements keep cash flowing. Meanwhile, Unilever’s strong consumer brands have repeat-purchase appeal and its cash flow is robust because of that.
Steady demand keeps Shire grinding forward, and its pharmaceutical offerings share similar consumable qualities as those of Unilever. With Whitbread, perhaps the most cyclical of the four, its strength is in brands such as Premier Inn, Costa coffee, Beefeater, Brewers Fayre, Table Table and Taybarns. The jewel in Whitbread’s crown is fast-growing Costa Coffee with the cash-generating repeat-purchase credentials I’m so fond of.
Outlooks
In February, Arm’s Chief Executive sounded upbeat, saying: “Demand for our technology is increasing, and during the quarter we signed multiple licences for the next generation of high-performance and secure ARM processors.” However, there was a note of caution with the firm speculating that economic uncertainty could influence consumer and enterprise spending, potentially impacting semiconductor revenues and industry confidence. If that happens, any share price weakness could shape up as an opportunity to buy into the longer-term growth story here at a discount.
After a good 2015, Unilever’s chief executive said in January: “We are preparing ourselves for tougher market conditions and high volatility in 2016, as world events in recent weeks have highlighted. Therefore, it is vital that we drive agility and cost discipline across our business.“
My guess is that Unilever will plough through any challenges, grinding them out, and moving its business forward as always. Again, any share price weakness could present investors with a decent buying opportunity.
In February, Shire’s chief executive sounded optimistic, saying: “Our continued focus on innovation has resulted in Shire entering 2016 with the most robust pipeline in its history.”
And Whitbread comes across as untroubled by the macroeconomic outlook. Its top executive said last week: “In the year ahead… we will continue to invest in improving our customer propositions, our digital and IT capabilities and in our winning teams to ensure we maintain our market leading positions. This will deliver long-term profitable growth and sustainable returns for our shareholders.”
All four of these firms operate good quality, cash-generating and enduring businesses, which means their valuations aren’t cheap. However, buying on dips, down days and during times of general market malaise can be one way of building up a position in the longer-term growth story for each. That’s why they’re candidates for my ISA watch list.
