It is widely believed that to make the most money investing, you have to own small-cap stocks. While there is some truth in this, you can still make a very good return investing in the UK’s leading blue-chip index, the FTSE 100.
Blue-chip profits
The great thing about investing in FTSE 100 stocks is that, unlike small-caps, the chance of you losing your hard-earned cash is significantly reduced. Some investors believe that the trade-off for this security is lower returns, but this is not true for the market’s top growth champions.
Compass Group (LSE: CPG) is a great example. Over the past 10 years, shares in Compass have produced a total return of 18.9% per annum including dividends. Over the past five years alone, the company’s expansion has been enough to turn £10,000 into £30,000.
But what does the future hold for the group? Well, the catering business is a reasonably defensive industry, although it has razor-thin margins. This is where Compass excels. The company’s size allows it to achieve economies of scale in markets where others struggle. It operates in around 50 countries, employs over 550,000 people and serves over 5.5bn meals a year.
By reinvesting its profits back into operations, the group has been able to grow revenue at a rate of 6% per annum for the past five years, and as margins have improved with scale, net profit has expanded by 14% per annum over the same period.
City analysts are expecting more of the same for 2018. Earnings per share growth of 5% for the year off the back of revenue growth of 4.7%. And due to the size of the firm, I don’t believe growth will slow any time soon as it continues to succeed where others fail.
A running elephant
Whitbread (LSE: WTB) is another running elephant. Owner of the Costa Coffee, Premier Inn, and Beefeater brands, Whitbread is one of the UK’s largest and most prominent businesses. Despite its size, the firm has grown earnings per share by 88% over the past five years. If it hits City targets for growth for the next two years, by 2019, earnings per share will be up 100% in seven years.
Like Compass, Whitbread’s size has enabled it to achieve wide profit margins through economies of scale. Reinvesting this cash into the business has helped the firm compound book value (shareholder equity) by just over 14% per annum for the past five years.
Nevertheless, despite this impressive growth, shares in the business currently trade at a relatively undemanding forward P/E of 15.6, falling to 14.6 for the year after. As well as this, the shares also support a dividend yield of 2.5%.
City analysts also believe that Whitbread is massively undervalued based on a sum-of-the-parts basis. By breaking itself up, analysts speculate, the shares could be worth as much as £52.20, 31% above the current level of £40.00 — that’s a tremendous potential upside for one of the UK’s largest companies.
