The big banks are cutting even further the return savers can get from their Cash ISAs. HSBC is set to reduce its rate before Christmas, following in the footsteps of Barclays and Lloyds. It means, for example, that savers with a Barclays Instant Cash ISA will earn just 0.4% on sums up to £30,000 — or a paltry £4 interest on every £1,000 held in the account.
High-quality shares held within a stocks and shares ISA should create far more income and potential for wealth-creating capital growth and here are two I think have particularly strong business models and prospects.
International drinks sales
The owner of drinks brands such as Smirnoff, Guinness and Baileys, Diageo (LSE: DGE), delivers consistent growth for investors and has a degree of recession-proofing built into the business model because people keep drinking whatever the economic climate.
Scotch at 25% of net sales accounts for the biggest part of the business, followed by beer (16%) and vodka (11%). In its most recent annual report, Diageo noted that sales of Scotch are growing in all regions except Europe. As the leading product category, I think this is important if the group is to sustainably grow year-on-year.
Beer sales grew 3%, so there’s slow and steady expansion in that category too. The strongest rise across the group came from gin and tequila, which increased by 22% and 29% respectively. Tanqueray and Gordon’s proved popular, the company noted, along with Casamigos and Don Julio.
Diageo owns a quality portfolio of often premium beverages and I think this is why it will continue to increase shareholder returns and drive up its value consistently.
Unilever (LSE: ULVR) is another owner of quality brands that consumers buy frequently and that help it grow sustainably. These include Dove, Ben & Jerry’s and Domestos. In its third quarter, sales were 2.9% up on 2018. The group identified emerging markets and home care as two areas that did well.
In January, Alan Jope was promoted to the role of CEO and most recently the chairman has announced he will be leaving the consumer goods giant. This fresh leadership at Unilever could give it the impetus to chase new growth opportunities, although I wouldn’t expect radical changes to a business model that works well.
The international sales of the group and its increasing exposure to dynamic emerging markets, I think, has an appeal to investors looking to invest long-term in a quality company. Exposure to Asia in particular should underpin growth in the coming years, along with heavy spending on marketing the products in each territory.
There’s no doubt investors have to pay for quality. Neither Diageo nor Unilever is cheap when you look at the P/E ratios — 24 and 23 respectively — and the below-average dividend yields (2% and 3% respectively) and single-digit rates of growth. But with so much political and economic uncertainty over the long-term, I believe it’s a price worth paying.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.
Motley Fool UK 2019