When looking for companies to include in my Stocks and Shares ISA, I like to focus on income and growth investments.
Here’s one company from each of these two buckets I already own and plan to buy more of in the future.
Stocks and Shares ISA buys
The first company on my list is insurance group Direct Line (LSE: DLG). I like this business because it’s highly cash generative, returning lots of the cash from successful operations to investors.
Unlike other sectors such as mining and utilities, insurance companies don’t require a tremendous amount of capital investment. This means they can generate a high return on their assets, and while they have to make allowances for claims, the overall demand on cash flows is significantly lower.
For example, in the company’s financial year ended 31 December 2020, it earned a return on tangible equity of 19.9%. By comparison, National Grid‘s return on tangible equity was in the mid-single-digits. These figures suggest the insurer is nearly three times more profitable than the utility group.
However, this profitability isn’t guaranteed. For example, a significant increase in insurance claims could cause losses at the business. This would send its return on tangible equity figure below zero. That’s the challenge with investing in insurance businesses. They can be highly profitable, but they can also incur significant losses as well.
Still, I’m well aware of the risks involved and I’d add the investment, and its 7.5% dividend yield, to my Stocks and Shares ISA today.
Growth investment
Reckitt (LSE: RKT) is one of the most significant investments in my Stocks and Shares ISA when it comes to growth stocks.
This company exhibits similar qualities to Direct Line. Last year, the group’s return on equity was nearly 13%. Meanwhile, its operating profit margin averaged 24% in 2018.
Unlike the insurance company, Reckitt doesn’t return all of its profits to investors with dividends. Instead, management ploughs hundreds of millions of pounds every year back into the business to develop new products and push forward with marketing campaigns.
This reinvestment has helped drive sales higher at a compound annual growth rate of 9.5% over the past decade.
But it hasn’t been plain sailing for the group during this period. Its $16.6bn deal for baby formula group Mead Johnson hasn’t lived up to expectations. Management is now looking to draw a line under this mistake. It’s sold off the Chinese section of the enterprise and is pursuing other growth initiatives.
Reckitt’s mistake with Mead Johnson illustrates it could still be a risky proposition despite the company’s attractive credentials. There’s no guarantee management won’t make another multi-billion dollar mistake.
Nevertheless, I’d buy the company for my Stocks and Shares ISA today, considering its long-term growth potential and profitability.
