If you have £3,000 to invest and don’t know where to start, I’m going to outline three high-quality income and growth FTSE 100 stocks I believe would make an excellent base for a starter stock portfolio.
Market champion
My first pick is online property portal Rightmove (LSE: RMV), one of the UK tech scene’s greatest success stories.
Over the past decade, the company has grown from a start-up into one of the dominant players in the online property market. Shareholders have reaped the benefits along the way.
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Earnings per share have grown at a compound annual rate of nearly 20% for the past six years. During this time frame, the company has reported an average operating profit margin of 73%.
City analysts don’t expect this trend to come to an end anytime soon. They’ve pencilled in earnings growth of 10% per annum for the next two years.
The stock currently trades at a forward P/E of 31, which looks expensive at first. Still, when you consider Rightmove’s dominance of the online property market, fat profit margins, earnings growth, and the fact that over the past three years the company has returned virtually all of the cash generated from operations back to investors via buybacks and dividends, I think this is a price worth paying for the business.
Profitable break-up
My next pick is the distributor of plumbing and heating products Ferguson (LSE: FERG). Perhaps best known for its Wolseley business here in the UK, Ferguson is an international growth story. It has recently been concentrating its growth efforts on the US market, which is still highly fragmented with plenty of potential for growth.
To help drive the expansion, management is plotting to break up the enterprise into two separate businesses, one devoted to the US, and the other focused on the UK business.
Estimates vary, but analysts believe the break-up could increase the value of the combined businesses by around 20% in the near term. Over the longer term, Ferguson’s leading position in both its domestic and international markets should help drive growth.
Today, the stock is changing hands for 17.3 times forward earnings and has a dividend yield of 2.5%. Over the past six years, the distribution to investors has grown at a compound annual rate of 6.4%, and it’s covered 2.3 times by earnings per share. So it looks to me as if there’s still plenty of room for the payout to grow further from current levels.
Undervalued
Packaging and paper company Mondi (LSE: MNDI) is the third stock I’m going to recommend for a FTSE 100 starter portfolio. Mondi has an impressive track record when it comes to growth.
Over the past six years, earnings per share have grown a compound annual rate of 17%. Management has grown the bottom line through a combination of organic and bolt-on growth. I expect this trend to continue as the business consolidates the global paper and packaging market further.
The group’s growing operating profit margin is a testament to its acquisition policy. As Mondi has snapped up smaller peers, its operating profit margin has risen from 9.3% to 15.9% over the past six years.
Today, investors can snap up shares in this growth champion for just 11.4 times forward earnings. There’s also a 4% dividend yield on offer for income seekers, which is covered twice by earnings.
