Quality stocks can be defined as companies that offer investors reliability and less risk in times of trouble. They tend to have dependable earnings, high operating margins and the capacity to generate above-average returns on the money invested by management (otherwise knowns as return on capital employed – ROCE).
Given the ongoing uncertainty regarding Brexit, the US/China trade spat and concerns over global growth, one could quite reasonably argue that these kinds of stocks will come into their own in 2019.
Here are three examples that I think could be worth holding for the next year and beyond.
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Strong and stable
With its huge portfolio of brands, drinks maker Britvic (LSE: BVIC) is always a company worthy of consideration when the going gets tough. The fact that shares in the Hemel Hempstead-based business have remained relatively stable over the last few months is a testament to this.
Recent positive trading has no doubt also helped sentiment. Full year numbers, released at the end of November, included a 5.1% rise in revenue to just over £1.5bn and 5.4% increase in adjusted earnings to £206m.
Available for 14 times forecast earnings in the current year, Britvic’s stock looks reasonably priced for the stability the company offers and comes with a 3.6% yield. The latter may look fairly average compared to the payouts on offer at other companies but the fact that the mooted 29.2p per share cash return is covered twice by profits suggests investors shouldn’t fear a cut any time soon.
It may not get pulses racing but global distributor and outsourcer Bunzl (LSE: BNZL) is, in my view, another great stock to hold when things are uncertain. Like Britvic, the FTSE 100 company’s share price has remained relatively stable over the final few months of 2019.
Its latest trading statement — released mid-December — stated that performance has been in line with expectations and that group revenue for the full year is now expected to be up between 8% and 9% at constant currency, thanks to decent organic growth and the impact of Bunzl’s never-ending penchant for acquisitions.
At almost 18 times earnings, the shares are neither screamingly cheap nor ridiculously expensive and come with a 2.2% dividend yield next year based on the current price. The latter won’t make income investors salivate but I think the predictability of the company’s earnings is far more important right now.
I’ll confess to being somewhat sceptical on bowling operator Hollywood Bowl‘s (LSE: BOWL) chances on the stock market, for the simple reason that its business model is fairly easy to copy. So far, however, the small-cap has done rather well. Its stock is up 12% since the start of the year, 39% since listing in 2016 and now changes hands for 16 times earnings.
Full-year results released this month were encouraging, with revenue up 5.8% to £120.5m and pre-tax profit up by 13.4% on the previous year to £23.9m.
While we can’t predict the future with any degree of certainty, it’s also interesting to note management’s belief that our forthcoming EU departure will not have an impact on the underlying performance of the business. The promise of a special dividend of 4.33p per share, on top of the final payment of 4.23p per share, would seem to back this up. That brings the total dividend to 10.59p per share, equating to a trailing yield of 4.6%.
