The reason for this is that successful growth businesses can often multiply in value many times before reaching maturity. Investing relatively modest amounts now could allow you to enjoy an impressive retirement income in the future.

Today I want to look at two businesses I think have the potential to continue expanding for many years.

Customers can’t get enough

Not content with buying chocolates in-store and online, Hotel Chocolat Group (LSE: HOTC) fans are now queueing up to buy the firm’s new Velvetiser in-home Hot Chocolat maker. The company said initial sales of the device — which retails at £99.99 — were six times greater than expected.

I suspect this price tag includes a hefty profit margin. But perhaps more importantly, it also ties customers into buying the firm’s single serve hot chocolate pouches, which retail at £12 for 10. This business model reminds me of the runaway success of Nespresso coffee and its imitators. And who doesn’t like “barista-grade hot chocolate”?

Of course, the Velvetiser is only a small part of the firm’s business at the moment. The good news is that growth is continuing elsewhere. During the six months to 30 December, sales rose by 13% to £80.7m, while pre-tax profit climbed 7% to £13.8m.

The company also reported a welcome 18% increase in operating cash flow. Despite opening 14 new stores, the group ended the period with net cash of £21.8m, up from £18.3m one year earlier.

A sweet-tasting buy?

Hotel Chocolat’s financial performance looks good to me, although I think it’s worth pointing out that earnings per share growth of just 7% is not exactly stellar. The group’s operating margin of 11% isn’t that amazing, either.

However, there are two things that do really impress me about this business. The group’s return on capital employed of 26% indicates that money invested generates attractive profits.

And although I’m not personally a fan of the product, the group’s continued growth and recent expansion to Tokyo and New York suggests that Hotel Chocolat could become a genuine premium brand.

The shares trade on 31 times forecast earnings for the current year, and offer a yield of just 0.6%. But if founder Angus Thirlwell can build this into a global luxury brand, I think today’s share price could look cheap in five to 10 years.

An under-the-radar growth bargain?

My next pick is also a branded consumer goods firm. Stock Spirits (LSE: STCK) produces a range of branded spirits which are mainly sold in Central and Eastern Europe and Italy.

The company recently reported a 27.8% share of the off licence vodka market in Poland. It also has a 34.2% share of the spirits market in the Czech Republic. In Italy, Stock is the number one branded grappa business and has strong positions in limoncello and brandy.

Last year, the group’s total sales rose by 8.7% to €282.4m, while operating profit rose by 16.8% to €48.7m. Cash generation looks good to me and the shares offer a useful dividend yield of 3.7%.

In my view, Stock Spirits’ 2019 forecast price/earnings ratio of 14 could make the stock a bargain buy, if the company can maintain recent growth.

The post £3k to invest? 2 growth stocks I’d buy to beat the State Pension appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hotel Chocolat. 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.

Based on the numbers released to the market this morning, however, I wouldn’t be surprised if some investors began to get interested, particularly as the company looks something of a bargain compared to industry peers.  

Spirited effort

Hailing “a period of good growth and significant brand investment,” revenue rose 6.9% at constant currency to €282.4m in the 12 months to the end of September. Adjusted underlying earnings rose 8.1% to €59.4m and profit climbed 13.8% to €33.2m.

CEO Mirek Stachowicz appeared happy with these figures, stating that the company’s strategy of “premiumising” its range and using digital channels to target millennials was proving effective. Business in Poland continues to be good and ongoing investment in the Czech Republic appears to have helped to address “headwinds experienced earlier in the year“.The only problematic market — thanks to its struggling economy — was Italy.

Debt is also coming down. This time last year, Stock Spirits had €53.1m in net debt. Today, it announced that this had fallen to €31.6m by the end of September. 

Today’s final dividend of 6.01 euro cents — equating a total dividend of 8.51 cents per share for the first nine months of 2018 — was another positive development and represents a 5.1% rise on that returned over the same period in 2017.  

Trading at 13 times earnings before markets opened this morning, one could argue that Stock Spirits also looks quite attractive price-wise. It’s certainly a lot cheaper than beverage-related shares such as Fevertree (LSE: FEVR) and Diageo, although I would argue that the latter more than deserves its premium rating.

As for the former, the capitulation of Fevertree’s share price since early September just goes to show the risks of buying stock in a company everyone appears to love.  Despite now being 40% cheaper, I’m still wary.

Falling star

Don’t get me wrong, Fevertree still bears many of the hallmarks of an excellent business. A strong brand, savvy marketing, massive returns on the capital it puts to use, a high operating margin, net cash on the balance sheet — the list goes on. As such, it’s not hard to see why institutional investors were so keen to buy up the stock when the company conducted a placing back in August (at 3,450p a share).

Nevertheless, the fact that these very same shares still change hands for 49 times earnings after the recent sell-off suggests this is one company that should appeal to only the most optimistic of market participants. With a huge political event now less than one week away, I’m not sure I’d include myself in this camp.

Befitting its growth credentials, dividends are negligible so prospective investors aren’t exactly being compensated for their patience either. The predicted 12.7p per share cash return this year means a yield of just 0.53% at today’s share price. That’s even less than the 1.45% offered by the best Cash ISA, never mind the huge payouts promised by some firms in the FTSE 100.

Since no company’s stock is worth purchasing at any price, I suspect Stock Spirits might be a better buy at the current time. 

The post This cheap dividend stock still looks a far better buy than Fevertree appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. 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.

Over the past two decades, shares in this company have smashed the FTSE 100, returning 310% since 1998 excluding dividends, compared to a return of just 10% for the FTSE 100 — that’s not 10% per annum, that’s 10% in total, a shockingly disappointing return from the UK’s blue-chip stock index. 

Including dividends, over the past 10 years, shares in Diageo have produced a total annual return of 10% per annum. Whichever way you look at it, this company has smashed the performance of the FTSE 100.

And I believe this can continue as Diageo builds on its position as the world’s largest spirits business.

Exploding growth 

It hasn’t been plain sailing for Diageo over the past five years. Earnings stagnated between 2013 and 2016. However, growth returned with a vengeance in 2017. For the year, earnings per share (EPS) jumped 24%. After taking a breather for fiscal 2018, City analysts expect EPS to leap 19% in fiscal 2019 and then 8% in 2020.

Unfortunately, Diageo’s growth isn’t cheap. Shares in the drinks giant currently change hands for 21 times forward earnings, making the company one of the most expensive stocks in the FTSE 100. The dividend yield is a less than impressive 2.6%. 

Still, I believe it is worth paying a premium for this business because the group owns some of the most recognisable booze brands in the world. These brands, such as Johnnie Walker scotch, have been around for decades and have established customer bases. Even though the spirits market is exceptionally competitive, these brands are likely to remain around for many years to come.

All in all, I am confident that Diageo will continue to beat the FTSE 100 making it the perfect investment for your retirement portfolio.

On sale 

If Diageo is too pricey for you, Stock Spirits (LSE: STCK) might be a better buy. 

The company is a leading owner and producer of premium branded spirits in Central and Eastern Europe, so it operates in the same business as its larger peer. Unfortunately, its small size means Stock does not have the same economies of scale. The business’s operating profit margin is only around a third of that of Diageo.

Nevertheless, it looks cheap compared to the growth the company is expected to produce this year in my view. Analysts have EPS jumping 93% for fiscal 2018, putting the stock on a forward P/E of 13.4. On top of this, the shares yield 4.2%. A trading update issued by the firm today confirmed it is on track to meet estimates, so I see no reason to doubt the City’s estimates.

When it comes to long-term growth, however, Stock’s potential is more uncertain. The company has a mixed growth track record, which makes me think that while near-term growth is set to shoot the lights out, investors could be disappointed over the medium term. 

With this being the case, I would rather pay a premium to be part of Diageo’s growth story.

The post Retire wealthy: Why I think this FTSE 100 growth stock will continue to smash the market appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Diageo. 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.

This FTSE 100 group has benefited from two major trends in recent years. The first is increasing consumer spending power in many emerging markets, such as China.

A second trend that’s affected the drinks market is ‘premiumisation’ — customers are happy to pay more for better quality products with more exclusive branding. Diageo has used this opportunity to launch a number of new high-end spirits.

Make mine a double

Of course, as Foolish investors we don’t want to invest in trends alone. We should also be aiming to own shares in high quality businesses at attractive valuations.

In my view, Diageo’s recent results confirmed that its quality remains very high. If we ignore the impact of exchange rates, sales rose by 5% last year, while operating profit climbed 7.6%.

This performance resulted in an operating margin of 30.3%. That’s very high, but it’s in line with performance in previous years. This is a very profitable business.

A 5.3% ‘yield’ for shareholders

The quality of this business isn’t a serious concern, in my opinion. What is harder to judge is its valuation.

Diageo stock never really looks cheap. But even by the firm’s own standards, the current valuation looks quite steep to me. At the last-seen share price of 2,836p, the stock trades on a 2018/19 forecast P/E ratio of 22, with a dividend yield of just 2.5%.

The only thing that makes this price tag more palatable is the £2bn share buyback planned for this year. This cash is being returned to shareholders indirectly, by reducing share count and boosting earnings per share growth.

My calculations suggest that the buyback and dividend combined equate to a 5.3% shareholder return for the current year. Personally, this is a stock I’d prefer to buy on the dips. But I believe it remains a solid choice for long-term investors.

Will this growth stock leapfrog Diageo?

Diageo’s size means that growth is relatively slow. One smaller contender in this sector is Stock Spirits Group (LSE: STCK), which sells branded spirits in Central and Eastern Europe. As you might expect, the firm’s product range is dominated by vodka.

Today’s half-year results show that sales rose by 5.3% to €124.1m during the six months to 30 June. Operating profit rose by 9.7% to €18m, giving the group an operating margin of 14.5%.

A strong performance in Poland appears to have been tempered with a more mixed performance in the Czech Republic and Italy.

What does worry me

The company’s performance in recent years has been inconsistent. Annual sales have fallen from €340.5m in 2013 to just €274.6m last year. Profits have also varied widely.

Stock Spirits doesn’t seem to have been able to deliver the consistent growth that makes Diageo so attractive.

In fairness, this may be changing. The company said that today’s results were in line with expectations. Analysts expect further modest growth in 2019, and strong cash generation allowed the group to reduce net debt by €14.4m to just €38.7m during the half year.

At 212p, the shares trade on a forecast P/E of 13.7 with a prospective yield of 4.1%. If the group’s recent stability can be turned into sustainable growth, then these shares could be good value.

The post Here’s why the Diageo share price offers you a 5.3% return appeared first on The Twelfth Magpie.

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• Has the turnaround finally started for Diageo shares?
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

Indeed, thanks to the company’s defensive nature, leading position in many markets and portfolio of well-respected brands, shares in Diageo have returned 50% during the past five years excluding dividends, double the performance of the FTSE 100 over the same period. Over the past decade, the shares have returned 130%, outperforming the UK’s leading index by 110% excluding dividends. And since 1999, shares in Diageo have returned 10 times more than the index in capital gains alone. 

Unfortunately, after recent gains, shares in Diageo are looking pricey. The shares trade at a forward P/E ratio of 21.5, which is a suitable premium for such a high profile firm, but it may scare some investors off. 

Still, if you’re looking for a Diageo substitute, Stock Spirits (LSE: STCK) may be an attractive alternative. 

Troubled past

The past few years have been turbulent for Stock Spirits. Between the end of 2014 and 2015, shares in the company lost around two-thirds of their value as the business struggled to beat the competition and work around new regulations in Poland, one of its primary markets. 

However, after this wobble, it seems that the company is now back on track according to its full-year 2016 results published today. 

After overhauling the business, Stock managed to eek out some revenue and volume growth during 2016. Pre-tax profit for the year grew to €39m from €32m in 2015, although headline revenue slipped to €261m from €263m. On a constant currency basis, revenue rose by 1.2% as sales volume increased 4.2 %. Lower finance costs helped boost overall profitability. Finance costs fell by €2.7m. 

It seems as if this trend of steady growth will continue as the company recovers from its past mistakes. Management noted today that while the Polish market continues to be “highly competitive”, the group is seeing “continuing stabilisation” of its performance in Poland as it works to restructure the business. 

A lower cost base, management changes, strengthened distribution agreements, office closures and product range reduction are also all helping to improve the business’s outlook. 

Cheaper pick

Stock’s outlook is improving but thanks to its troubled past, shares in the company look relatively inexpensive. 

City analysts expect the firm to chalk up earnings per share growth of 5% for 2017, which puts the shares on a forward P/E of 15.5 falling to 14.1 for 2018. On top of this attractive valuation, the company supports a dividend yield of 3.4% and the per share payout is covered around twice by earnings per share. For comparison, Diageo’s shares currently yield 2.8% and the payout is only covered 1.7 times by EPS. 

Overall, Stock looks to have put its troubled past behind it and the company now seems to be on a steady path to growth. Based on current forecasts, the business looks attractive and if management expands the business into other markets, the sky could be the limit for it. 

The post Is this company on track to become the next Diageo plc? appeared first on The Twelfth Magpie.

More reading

• Newsflash: the Diageo share price just climbed!
• Which British dividend shares could supercharge a passive income portfolio in 2026?
• Has the turnaround finally started for Diageo shares?
• How much longer can the Diageo share price stay this low?
• Is it finally game on for the Diageo share price?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.