It’s not a name everybody knows, but 3i (LSE:III) is beating allcomers to become the fastest-growth FTSE 100 company.
When I talk about growth, I’m talking about the best-run businesses. Those who are outperforming the crowd. Why buy straw when you can buy gold?
So I’ve delved through the data to find the compound growth rate of Britain’s biggest-earning companies.
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My research shows that 3i just pips another recent FTSE 100 pick of mine: Glencore.
Over the last three years the private equity investing giant has improved its earnings per share by 177%. Glencore sits in second spot with 161%.
What does it do?
Private equity involves early-stage investors providing funding to companies that aren’t public yet. 3i has invested heavily in healthcare and value-for-money firms, to its benefit.
89% of the companies it bought stakes in grew their earnings in 2023. That means it has been very successful at finding the diamonds in the rough.
What about if we look at revenue? 3i’s compound annual growth rate is nearly double that of the second-best Footsie company of the last three years: Endeavour Mining.
What does it cost?
When I say cheap, I really mean it. To buy 3i today, you’ll pay just five times earnings. That, by the way, is the same thing as saying it has a price-to-earnings (P/E) ratio of five.
The other thing I’m quite keen on is the dividend. At the moment, a 2.65% dividend yield is still better than 40 of the companies on the FTSE 100. But there is much more in the tank here.
Bosses are looking to hike the dividend by a walloping 23% by 2025. So 53p a share becomes a more attractive 65.7p a share.
What’s the outlook?
Probably 3i’s best-performing investment is a majority stake in Action, the Dutch discount retailer. The low-budget supermarket is experiencing exponential growth at the moment. From 300 stores in 2012, it now operates more than 2,500 in 11 countries.
And the ongoing tough economic circumstances across Europe are driving a mass increase in its customer base. This benefits 3i as a majority investor.
Why now?
There is an odd bias among private investors in the UK. It’s one I’ve suffered from myself, in the past.
This is the inability to buy shares that are rising in price. It stems from an unwillingness to pay more than a company is ‘worth’. To grab a bargain.
But stock prices rise in line with earnings. If earnings go up, stock prices — whether it’s on the FTSE 100 or elsewhere — will also rise.
I recall something the legendary stock-picker Peter Lynch said when he was managing the Magellen Fund at Fidelity.
In the short term, “markets will go up and down,” he said, “[but if] profits rise 8% a year, stocks follow. That’s all there is to it.”
Under Lynch, the Magellen Fund averaged 29.2% annual return over 13 years. That made it the best-performing fund in history.
