Type “How do I retire early?” into your search engine, and you will see thousands of articles on how to do it. The problem is most of them contain only generic advice: work out your financial needs, start saving early, keep your outgoings low, make your money work for you and so on. There’s nothing wrong with this, but most serious savers I know want more detail. How exactly do you put your money to work? What asset classes ought to be included? What weighting should be given to each? Which individual investments should you consider and why?

Of course, the answers to these questions depend on a person’s attitude to risk, his/her financial expertise and the amount of time available to devote to researching and implementing a savings plan. Some prefer their money to be managed by expert fund managers so they can enjoy the benefits of diversification and not have to worry about choosing individual investments or monitoring a portfolio daily. If, however, you are like me, you will want a lot more control. I like to know exactly where my savings are always. Generalised six-monthly reports from a fund manager won’t do.

For those who prefer hands-on involvement, there is a constant requirement for information. And if you want to include stocks in your portfolio — something I believe is essential to any early retirement plan — then you need much more than generic advice. You need specifics. This is where financial websites like The Motley Fool can help with investment ideas and strategies.

Mega-brands

Having spent 30 years as an investor, here’s one stock I’ve liked for a long while and I believe could form part of any sensible long-term savings plan. It’s one of those stocks I have on my sleep-well-at-night list.

Reckitt Benckiser Group (LSE: RB) is a member of the FTSE 100 and my preferred consumer goods pick right now. It enjoyed an operating profit margin of 27% over the last 12 months and generated a solid 15% return on equity, both of which I would expect to continue given the sizeable moat around this business. For those who are looking for income, the stock yields almost 3% and is well covered.

The share price has come off its high of two years ago, mainly because of an expensive cyber-attack in 2017, but that doesn’t worry me. I try not to get too distracted by issues like that; investors need to look beyond short-term noise. I believe this owner of mega-brands such as Dettol, Durex, Nurofen and Clearasil will be a great hold for many years to come. Why? Well, despite coming off its peak, since the beginning of this millennium, the stock has risen seven-fold. And remember, that period includes the financial crisis of a decade ago.

The post 1 share I’d recommend to help reach early retirement appeared first on The Twelfth Magpie.

More reading

• Are we staring at a once-in-a-decade chance to buy cheap FTSE 100 shares like this one?
• 3 UK shares to consider buying and holding for a decade
• If someone starts investing now with £18 a day, how much might they have by Christmas?
• Why bother with a SIPP now rather than wait 10 years?

martinbodenham owns shares of Reckitt Benckiser. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I trained in the industry before computers. The latest technology around at the time was a Kalamazoo paper-based accounting system, and when the comptometer operator — remember them? — appeared on-site with a giant adding machine, we all became excited. How things have changed. Who would have thought the dreary business of double-entry bookkeeping and payroll accounting could lead to a thing of financial beauty?

Established in 1981 — interestingly, the same year I started training to become a member of the Institute of Chartered Accountants — Sage Group (LSE: SGE) has helped transform the accounting industry with its desktop and cloud-based accounting and payroll software. You may not know the company’s name, but I guarantee you many small and medium-sized companies in your neighbourhood will be using its products. Today, it sells to 23 countries throughout Europe, Africa, Australia, Asia and Latin America.

So far, so boring. What gets me excited, however, is the financial performance of the company.

Financial wizardry

In the year to 30 September 2018, revenues were £1.85 billion, an increase of 40% over the previous four years. Last year, the company produced an operating profit of 25% on sales, and as the balance sheet contains only a modest amount of debt, most of that profit fell through to the bottom line. Over the last 12 months, it has generated a return on equity of 24% which is nothing short of financial wizardry, in my opinion. Sage is a cash machine, too; in 2018 it generated free cash flow of £280 million, almost the same as its net income. The stock has produced an average dividend yield over the last five years of some 2.3%, paying out a little over half of its net income.

With numbers like these, it is little wonder the share price has rocketed. Over the last 10 years, it has risen four-fold, which means it’s not cheap today. In fact, the stock has climbed 20% during 2019 alone. With an historic PE of 26x, this investment is not for the faint-hearted.

But, in my view, there is still growth ahead as more of its customers move over to the cloud and take up the company’s software-as-a-service offerings, something that makes the customer base even stickier. You only have to look at Sage’s North American equivalent, Intuit, to see just how much money can be made from selling accounting solutions to mid-sized companies. Plus, with its fortress-like balance sheet, I believe Sage can withstand any downturn. With its prodigious cash flow, Sage would be well placed to gobble up some of its smaller competitors in a down market.

The post This boring FTSE 100 company has seen its stock price surge four-fold in 10 years appeared first on The Twelfth Magpie.

More reading

• How has Sage become one of the FTSE 100’s best bargain shares?

Martin Bodenham owns shares of Intuit. The Motley Fool UK has recommended Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While I didn’t quite make it by 50 — I was 53 when I left my office in London for the last time — it was still young by most standards today. When I meet other people my age, invariably they are still working and one of their first questions is, “How did you manage to retire so young?”

My answer often surprises them as it sounds simple and involves steps that most people can take, provided they start early enough. Here’s what I say:

Contain your costs

I cannot stress this enough. Throughout my career, I found many of my colleagues spent all their income, no matter what level they were paid. While that is a personal choice — people are free to do what they want with their own money — such a live-for-today mindset is rarely compatible with early retirement. Savings must come from somewhere, unless you are one of the lucky few who inherit a large sum from a rich relative.

My approach to spending has always been frugal. A personal rule of thumb was to save one third of my annual income, and I did this by cutting back on luxuries and containing my costs. It’s amazing how much can be saved by shopping around on the internet and negotiating over big-ticket items.

Start investing as soon as possible

There’s no point saving if you don’t make your money work for you. In my opinion, the best way to do this is by investing in the stock market. Begin as early as you can and stick with it over the long term. I began in my early 20s and continued right up until retirement. That way, I enjoyed the benefits of compounding over three decades.

Tax-efficient investing through ISAs and pension arrangements is also important in order to maximise wealth. In addition, at times throughout my career, I was too busy to devote hours researching individual stocks. That’s where the likes of The Motley Fool can help, while I also looked for fund managers who could do this for me but only those who charged low fees and costs. If I was looking today, I’d be considering Fundsmith Equity as a good home for my savings.

Be realistic

Earning a lot of money helps some to retire young, but most people I know who have stopped work early aren’t members of the 1%. Rather, they are men and women who, in exchange for the freedom from paid work, have accepted that many of the material things they used to enjoy can no longer be justified.

If changing your car every two years or going on expensive foreign holidays are important to you, then its unlikely you’ll be comfortable with the trade-offs that need to be made in order to live on a lower income. In the end, it’s a choice: time versus money.

The post Want to retire by 50? Here’s how appeared first on The Twelfth Magpie.

More reading

• FTSE 250 stock CMC’s shares have rocketed 51%! What’s going on?
• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?

Martin holds shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Maybe it’s my private equity background, but when I consider buying a stock, I hardly look at the dividend history. The most important metric for me is return on capital (ROC). A company that consistently generates a robust ROC will always grab my attention. There is no better measure to demonstrate the effectiveness of its leadership team in exploiting the business’s competitive position in the market.

Take one of my favourite stocks, Stryker Corporation. Headquartered in Kalamazoo, Michigan, the company is a leading manufacturer of medical devices. Over the last 12 months, Stryker enjoyed an operating profit margin of 23%, producing a stellar return on equity of 33%. Its unswerving superior financial performance has led to the share price rising two and a half times over the past five years. Yet many dividend investors wouldn’t have considered this stock because of its low (circa 1%) dividend yield. Rather than fill the pockets of shareholders, the company has kept to a payout ratio of 36% and chosen to plough most of its earnings back into the business.

That is my point. Provided a company can find high-returning projects in which to invest its capital, I don’t mind if dividends are low or non-existent. In those circumstances, I’d much rather see profits reinvested. The resulting additional earnings will eventually feed through to the stock price, and I’ll receive my reward that way. I don’t mind whether my return comes through capital appreciation or dividends. What matters to me as an investor is total shareholder return. And if I need more cash than the current dividend provides, all I have to do is sell a portion of my holding.

By looking at total return rather than income only, I believe I have a greater universe of investments from which to choose. Some fund managers have picked up on this. For instance, my preferred fund manager is Terry Smith who runs Fundsmith Equity, a London-based open ended investment company (OEIC). Ranked number one amongst his peers, Terry and his team have achieved a 160% growth in unit value over the last five years, almost double that if you take their record back to inception in 2011. He’s my kind of manager, making long-term conviction buys in a portfolio of low-debt, market leading, international large caps. If an investor ever needs more cash flow from his holding in the Fundsmith OEIC, Terry offers a regular withdrawal facility whereby he will automatically sell part of it at regular intervals in order to supplement the paid-out return.

The post Why dividend yields don’t matter to me appeared first on The Twelfth Magpie.

More reading

• FTSE 250 stock CMC’s shares have rocketed 51%! What’s going on?
• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?

Martin holds positions in both Stryker and Fundsmith. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

You see, private equity (PE) is one of the most cyclical games in town. The best returns for a PE firm come from adding to the investment portfolio during the low points in the cycle — that’s why the industry harps on so much about “vintage years” — and then selling assets close to the top. Sure, good portfolio management of the underlying companies can move the needle, but it won’t make up for getting the cyclical timing wrong.

Let’s take a closer look at 3i’s recent portfolio activity. In the two years to 31 March 2018, the company realised cash from investments to the tune of £2.6bn, a level some 80% higher than the average of the previous five years. So far so good. It makes sense to offload investee companies when valuations are at their highest and corporate acquirers are out with their chequebooks. And it appears 3i has sold well, achieving a 2.4x money multiple on assets sold last year. My concern, however, is the potential realisation values of those businesses that remain in the portfolio. For it is those that will drive future profits.

I mentioned this is a cyclical business. According to BDO’s latest quarterly private equity price index, the average enterprise value to EBITDA multiple on acquisitions made by PE firms came in at 12x (just a little lower than the FTSE All-Share’s 12.8x). This represents a 50% increase in the average multiple paid since 2013. Competition from other PE houses – flush with cash from record fundraising – and trade buyers, fuelled by cheap debt, has pushed up the value of private companies.

3i doesn’t disclose what it pays for individual portfolio companies, but it is reasonable to assume it has not been immune to escalating prices. While the firm has done well selling into this frothy market, my concern is that it has also stepped up its new investment activity at the top of the cycle. In 2018, it invested £587m of its capital in new deals, compared to only £100m in 2013. Given 3i’s stated target holding period of four to five years and the high multiples it is likely to have paid for recent investee companies, I struggle to see much scope for capital growth in the portfolio in the medium term.

Worse still, if we are at or near this cycle’s peak, and multiples paid for private companies drift lower from here, I expect to see 3i’s reported profits and share price take a hammering over the next couple of years. At that point, I’ll consider owning the stock again, but I’m in no rush to do so.

For investors still intent on increasing their exposure to private equity, I’d be looking for those players trading at or below net asset value, such as ICG Enterprise Trust.

The post Why I believe this FTSE 100 stock has peaked appeared first on The Twelfth Magpie.

More reading

• Will the FTSE 100 crash in June?
• One of my favourite UK shares is down 31% this year. Am I crazy to buy more?
• Understanding this Warren Buffett quote can help you build stock market wealth
• Down 37% and still sinking! Is this now one of the FTSE 100’s best value shares?
• This FTSE 100 stock crashed 24% in a day. I asked myself what Warren Buffett would do

Neither Martin nor the Motley Fool UK hold a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While investment giant 3i Group captures most of the attention of investors looking for exposure to private equity (PE), I believe a much smaller competitor offers greater value right now and provides far better downside protection against a market sell-off.

Over the last three years, ICG Enterprise Trust (LSE: ICGT) has seen its share price increase by 60%. Impressive but not as good as 3i’s doubled price over the same period. The problem is, I believe there is a lot of froth in 3i’s current market value… the stock trades at a whopping 40% premium to net asset value, and that gap has been growing in recent months — something I find concerning at this late stage in the cycle. By contrast, ICG Enterprise Trust’s shares trade at an 18% discount today. Given how similar the two companies’ investment criteria are, I find this wide disparity in share price hard to fathom.

Both vehicles provide investors with access to mature, middle-market private companies, primarily in Europe. The key difference is that just over half of ICGT’s investments are in funds managed by external PE managers, something I believe provides a welcome spread across a wide portfolio of underlying companies. Furthermore, the lion’s share of these third-party-managed investments is in high-quality funds managed by the likes of CVC, Graphite, BC Partners and other leading PE houses. Most individual investors would find it impossible to gain entry into these highly respected funds on their own.

One more thing. Emma Osborne, ICGT’s lead portfolio manager, has been in that role for 13 years and so has a detailed grasp of the business and deep relationships with those third-party fund managers. While some of 3i’s top executives have been in situ for a similar length of time, I don’t get the same level of comfort when examining the bios of the company’s investment managers closest to the coal face. In private equity, where investee companies can take five to eight years to reach an exit, longevity of service among the hands-on investment personnel really matters.

With over £700m of net assets, ICGT is no minnow. Plus, it offers substantially the same benefits as an investment in 3i — exposure to later-stage private companies without the risks associated with start-ups and venture capital — but, in my view, with significantly less risk of a collapsing share price. Its sizeable discount to net asset value is precisely the type of financial cushion I’m looking for in the market right now.

The post 1 investment trust I’d be happy buying today appeared first on The Twelfth Magpie.

More reading

• FTSE 250 stock CMC’s shares have rocketed 51%! What’s going on?
• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?

Neither Martin nor The Motley Fool UK has any position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.