Finding a safe home for your cash in the stock market isn’t always easy. After all, who can predict what will happen in the future?
Today I want to explain how I think you can improve your stock picking success rate by focusing on a certain type of company.
Boring or brilliant?
We can’t predict the future, but we can learn from the past. If a company has traded profitably over long periods and through wars and recessions, there’s a good chance it will continue to do so. If it also pays regular dividends and looks cheap, then I start to get interested.
The first stock I want to look at today is FTSE 100 chemicals group Johnson Matthey (LSE: JMAT). This company’s history stretches back 201 years to 1817, when it traded as an assayer, testing the purity of precious metals.
Today its largest division is Clean Air, which makes catalytic converters and other emissions control systems for cars, buses, and trucks. This business accounts for around two-thirds of sales and profits.
Why I’d like to own this stock
Johnson Matthey’s dividend has not been cut since at least 1992 — the earliest I could find records. That’s 26 years of unbroken income, during which the annual payout has risen from 10.3p per share to 80p per share.
If you’d bought the shares back then, the current dividend would give you an annual yield of about 14% on your original investment. The value of your shares would also have risen by nearly 400%.
As we head into the electric vehicle age, Johnson Matthey is preparing to reinvent itself as a major battery manufacturer. Given the firm’s track record, I think there’s a good chance it will succeed.
In the meantime, the shares look good value to me on 12 times 2018/19 forecast earnings, with a 3.1% dividend yield. This is a stock I’d buy and hold forever.
Another long-term winner?
My next pick is cardboard packaging group DS Smith (LSE: SMDS). This firm was founded in the 1940s but now trades in the FTSE 100, suggesting a powerful growth story.
DS Smith counts firms including Amazon, Proctor & Gamble and Danone among its customers. Despite their strong bargaining power, it was able to recover rising paper costs and lift its adjusted operating margin from 8.7% to 9.9% during the first half of this year.
The group’s sales rose by 15% to £3,073m during the six-month period, while adjusted operating profit was 32% higher, at £304m. Return on average capital employed, a measure of profitability, was unchanged at 13.9%. I see this as a strong figure for a business of this kind.
Acquisitions have helped to boost growth and create economies of scale. But the firm isn’t expanding at any cost. Today management announced plans to sell the group’s plastics business. In my view this makes sense, given the firm’s focus on paper and cardboard packaging and growing anti-plastic consumer sentiment.
Too cheap to ignore?
The DS Smith share price has fallen by more than 35% since the summer. I think the sell-off has gone too far. At about 320p, the stock trades on 8.9 times forecast earnings and offers a 4.9% dividend yield. I’ve added the shares to my buy list.
