All stock market investors should have two priorities at the forefront of their minds right now:
- Growth
- Dividends
While it's very much up in the air as to whether the Australian economy will enter a recession, it's true that we have a long way to go to replicate the great living and working conditions experienced during the recent mining boom.
Our national growth has been 'below trend' for many years and Glenn Stevens recently suggested that perhaps our 'trend' was actually wrong, and recent growth levels are the 'new normal'.
With the economy as a whole growing slower than expected, finding a business that will grow faster than the rest of the economy becomes much more important for increasing your wealth.
Secondly, with rates as low as they are, investors will want to see dividends that can grow over time, providing a source of income that can be used to pay down debt or buy more shares.
Here are my three favourite growth and dividend stocks right now:
Retail Food Group Limited (ASX: RFG) – last traded at $4.12, yields 5.9% fully franked
Despite being bearish on retail stocks in general, Retail Food Group now makes up 4% of my portfolio. I feel that the nature of the company's products – sold at franchises like Donut King, Gloria Jeans, Michel's Patisserie, Pizza Capers and more – insulate it quite well from downturns in consumer sentiment and/or economic conditions.
RFG also owns approximately 1/3rd of the coffee roasting market in Australia which offers additional competitive advantages, and the company's plans to expand overseas offer serious upside over the next decade or more if conducted successfully.
Retail Food Group is cheap, has a robust balance sheet that produces loads of free cash, and if its expansion goes as planned I wouldn't be surprised to see it paying more than 10% (of today's prices) dividends in ten years' time.
Carsales.Com Ltd (ASX: CAR) – last traded at $9.55, yields 3.7% fully franked
Carsales has a lower dividend than Retail Food Group but, like RFG, it has a business model that produces piles of free cash and offers substantial opportunity for international expansion.
In addition to exposure (through part-ownership) to several equivalent car selling websites in countries like Brazil and South Korea, Carsales.Com also owns approximately 20% of iCar Asia Ltd (ASX: ICQ), which owns similar websites in Indonesia, Malaysia, and Thailand.
Carsales thus has exposure to a wide variety of emerging economies, and replicating the success of carsales.com.au in one of those markets could see Carsales double (or more) in size. There are also substantial opportunities to expand the company's footprint horizontally into parallel services like car safety inspections, auto financing and selling tyres (all of which Carsales is doing at present).
My estimations of dividend growth are substantially lower than Retail Food Group as I expect Carsales will spend heavily on increasing the size of its holdings in part-owned subsidiaries. Nevertheless, Carsales has ample room for growth in both dividends and profits, and is a solid long-term opportunity at today's prices.
Greencross Limited (ASX: GXL) – last traded at $6.18, yields 3.1% fully franked
Finally, Greencross is the riskiest of the three thanks to a balance sheet that is not producing any free cash flow. This means that company debt is expanding as the pet retailer cannot fully finance its expansion plans with the cash it is currently generating.
However, this situation should rectify itself in the next two years, with the company's growth plans becoming self-funding from 2017 onwards. Those growth plans involve co-locating 'grooming-', 'vet-', and 'retail-' -type stores, as company research shows that customers spend a substantially increased sum of money when they have access to more than one Greencross store.
Additionally, through a variety of methods, Greencross hopes to capture approximately 20% of the national pet market over time (holds 8% currently), a $9 billion dollar industry that is growing at approximately 4% per annum – nearly double the rate of the general economy.
I do have several reservations about this stock (which I talk more about here), however if the company performs as management intends then I believe it offers significant upside potential over the next decade.
