Buffett Checklist: 3 Proven ASX Growth + Dividend Shares
Dear Investor Club reader,
When I invest, I’m looking for companies that can grow profit and pay dividends.
Below, I detail three ASX-listed companies which have proven it can be done.
But before we get to the three proven companies, here’s what I’m looking for…
My Stock-Picking Checklist
Regular readers will know my investing checklist is unashamedly simple and, from a high level, is nearly identical to the investment process detailed by Warren Buffett and Charlie Munger:
- Buy shares in businesses/shares I can understand
- With a competitive advantage
- Run by aligned and talented management, and
- Which can be purchased at a reasonable price
It’s a simple strategy that has served me (and other investors) well over the years, so that’s what I’ll keep doing. (for a free PDF download on the strategy click here)
Let’s run the 3 Aussie companies below against the four points on my checklist.
TPG Telecom Ltd (ASX:TPM) – Dividend Yield: 0.5%
TPG’s trailing dividend yield leaves something to be desired.
However, as a long-term investor, I’m looking for sustainable and growing dividends. First and foremost that comes back to understanding the business and its drivers of profit.
TPG is willing to trim its dividend payments when it believes there is a better use of its cash. Its investment in mobile could explain why its trailing dividend yield looks a little low right now.
But make no mistake TPG has rewarded its loyal shareholders many times over in the form of dividend income. Indeed, TPG’s share price has come a long way since its lows of 16 cents in 2008/2009.
Investors shrewd enough to buy and hold TPG between the Global Financial Crisis (GFC) and October 2018 would have made 400% of their money back in dividends (plus franking credits). In addition, with its share price around $8, capital gains would be close to 4,900%.
That’s not the type of investment we can expect too often — or at all. And I’m certain a smart investor would be saying, “Owen, we don’t drive our investments looking through the rear-view mirror!”
That’s right, TPG has done very well historically.
But how about the future?
There are two key reasons I’m confident in TPG’s future:
- TPG founder, David Teoh, has heaps of skin in the game and has proven himself many times over. Meaning, since he owns so many of his own company’s shares his interests should be aligned with other investors like me. Having a CEO and board with ‘skin in the game’ is essential (see the checklist above)
- TPG is backed by a highly respected corporate investor in Washington H. Soul Pattinson & Co. Ltd (ASX: SOL). More on them below.
TPG is far from a risk-free investment — the Australian mobiles and broadband market are changing rapidly. And the merger with Vodafone presents considerable opportunity and uncertainty. It also doesn’t have the most attractive moat.
The verdict: Due to valuation, I’ve got TPG shares firmly on my long-term watchlist. Should prices fall, I’ll be running the ruler over them but until then I’m not rushing out to buy.
Washington H. Soul Pattinson (“Soul Patts”) – 2% dividend yield
Again, Soul Patts’ current dividend yield won’t knock the socks off an investor (especially if they’ve been investing in ASX bank shares!).
But as with TPG, what Soul Patts lacks in yield it makes up for in long-term modest growth potential and excellent management.
Soul Patts is a conglomerate style company. Meaning, it buys — and holds — large chunks of other companies like TPG, Australian Pharmaceutical Industries Ltd (ASX: API), Brickworks (ASX: BKW) and many more.
Run by the Millner family, Soul Patts has one of the best investing track records I have seen in Australia. Having not missed a dividend payment in 20 years the track record is superb.
I don’t expect the same amount of capital growth and dividends from Soul Patts going forward. Put simply, it’s harder to grow an already larger pie. But I’ve learned time and again to give the Millner family the respect they deserve, so it’ll remain on my watchlist until I’m comfortable to pull the trigger.
ARB Corporation Ltd (ASX: ARB) – 2% dividend yield
ARB stands for Anthony Ronald Brown, the founder of Australia’s most popular and respected 4×4 accessories brand.
ARB successfully tapped one of the most lucrative niches in Australian culture: our love affair with suburban SUVs and the outdoors. The red and black ARB logo can be found on bullbars, lighting bars, trays for utes and much more. It also owns and distributes other brands through its growing store-owned network and third-party distributors.
A family run business since the 1970’s, ARB’s profit and dividend payments more than doubled in the decade to 2018, so it’s easy to see why its share price recently hit all-time highs.
I think ARB has a fairly strong competitive advantage and it may not be apparent to some investors on first glance. Indeed, since ARB works with car makers, its bull bars are designed to fit new model cars, they’re rated to the highest safety standards and then tested. That keeps smaller players out of the market.
So why don’t I own ARB shares today?
In my opinion, ARB fails the fourth point on my checklist: valuation.
ARB has benefitted immensely from the rise of SUVs/4x4s and new car sales in Australia. Sales for both new cars and SUVs are consistently chalking up new records. Look around, it seems nearly every soccer mum and dad own an SUV.
Unfortunately, I think we may be reaching a tipping point with a more normalised level of 4×4 and SUV vehicle sales in Australia.
If ARB achieves similar success in North America (the home of big utes / “trucks”) or Europe, my concerns about its dependence on Aussie consumers will prove wrong. But while it has shown some signs of success aboard, it’s still early days.
So although I would love to invest in an iconic Aussie brand like ARB, I know patience won’t lose me money.
Buy, Hold Or Sell
Seasoned share market investors know share prices are often driven by two things: investor emotion (in the short-term) and company financials (over 3+ years). Although I wouldn’t rush to sell these three companies (if I held them), I believe they are somewhat pricey. That makes them a ‘hold’ in my book.
Why Holding is Important…
As an aside, I think it’s worth mentioning that the overwhelming majority of investment returns tend to come from holding great companies. Meaning, we don’t make money in the buying or in the selling of shares — we make money from doing virtually nothing and letting the company grow.
As my favourite business writer, Morgan Housel, once put it: “99% of long-term investing is doing nothing; the other 1% will change your life.”
If there’s one thing I’ve learned it’s the need to be patient and wait for great buying opportunities. Not just good opportunities. Great opportunities.
When it comes to buying shares for my family’s portfolio and picking new ideas for Rask Invest, I’m looking for either deeply undervalued established blue chips, or the TPGs, ARBs and Soul Pattinson of 10 years ago.
Fortunately, outside the ‘usual suspects’ there are some great opportunities right here on the ASX.
Cheers to our financial futures!
Lead Adviser, Rask Invest
Disclosure: At the time of publishing, Owen Raszkiewicz does not have a financial interest in any of the companies mentioned.
This article contains general financial advice only and should not be relied upon. Remember, past performance is not a reliable indicator of future performance. Prices recorded for this update taken as of 9 October 2018 and are believed to be accurate, but cannot be guaranteed as reliable. Dividend yields were calculated using data from Morningstar.