Unless you're a stock trader trying to jump in and out of stocks to catch short-term gains, and like that adrenalin rush of winning similar to watching V8 racing, you probably like companies that just keep to what they do best, and grow value for their dear shareholders without too much fanfare.
To make sure the quality of earnings is great, you could only look at companies' per share earnings growth, but since we want long-term quality, let's look at total shareholder return over five and 10 years. That covers both share price increase and dividends paid along the way.
We also want only those companies that have steady net profit margins and return on equity over 10%. Here are three that made the grade, and maybe they can be winners in your portfolio of the future.
Resmed (ASX: RMD), global developer and seller of respiratory disorder related medical products, is a $7.7 billion business by market capitalisation, and its innovations have returned to shareholders an average annual 15% over the past 5 and 10 year periods. Its net profit margin is consistently in the high teens, and ROE at 19% in 2013. Its largest market is the Americas, and about 32% of revenue comes from Europe, so it has access to large populations to further its growth.
Adelaide Brighton (ASX: ABC) is a supplier of cement and lime to major industrial sectors, and over the past 10 and five years, it has returned to shareholders on average annually 18.4% and 21% respectively. It supplies the materials that literally become the building blocks of a growing economy, and you don't have to worry about some foreign competitor creating a new kind of rock, so it has some market protection there.
ALS (ASX: ALQ) was called Campbell Brothers up until 2012, and its specialty is in testing and analytical laboratory services that cover minerals, life sciences, energy and industrial applications. About 45% of its revenue comes domestically, so it has good global diversification for its various services. Its total shareholder return over the past 10 years has been on average 27.8% annually, with its most recent five-year period returning on average 23.5% annually.
Its net profit margin started out low around 10 years ago, but it has been able to improve the quality of its earnings, and now it is over 15% while ROE is 23%.
Foolish takeaway
These attractive statistics are what investors look for, but it doesn't mean that next year or even the year after that they will automatically give the same returns.
We are looking at consistent past growth that signifies quality companies, and that's where you begin to look more deeply into them to understand if they have the same future potential.
