When George Osborne introduced the Junior Isa (Jisa) in 2011, one of the first things I did was to encourage my siblings to open up accounts for their nippers. Like most parents, they'll probably go down the savings account route or trickle money into low-cost tracker funds. However, if you're interested in the stock market (and seeing as you're reading the IC you probably are) it could be a good idea - and a bit of fun - to add a sprinkle of shares to the mix. It could also be a great tool to get your kids interested in finance and investing; what better way to get youngsters to appreciate equity markets than to tell them that they have a stake in the store where they buy their sports kit, or remind them as they ride on a rollercoaster that they own a small part of Alton Towers? To help you along the way, we've compiled a list of shares we think will do well over the long term and, in some cases, have characteristics that might interest a child. Moreover, we've kept to age-appropriate categories that exclude tobacco, booze and defence.
This should by no means be considered a portfolio - the £4,000 Jisa limit this year limits the number of stocks you can purchase - but it is a selection of shares that we think offers growth, reliability, income, value and fun and ideally a combination of all five. Equities might not top your kids' birthday or Christmas wish lists, but if they balloon into a tidy sum years down the line, they'll be the best present ever when those kids turn 18.
1. A bank you can trust: HSBC
Post-financial crisis, most of the large financials no longer have particularly strong income characteristics and aren't seen as especially reliable over the long term, given their exposure to enormous books of poorly-performing legacy loans and ongoing conduct issues. But there is one exception: HSBC (HSBA), which is both huge and global. Significantly, it generates a big chunk of its earnings in Asia's fast-growing markets. It's also very well capitalised and a combination of restructuring and disposals have left it generating more capital than it can practically use: that's supporting a five per cent-plus dividend yield. Finally, the shares aren't especially expensive for the sector - about 1.3 times forecast tangible net assets - leaving them rated in line with banks that face a rather tougher future.
2. A roof over your head: Berkeley Group
Knowing that your money is helping to build the homes of thousands of people across the UK is a pretty compelling reason to own shares in a housebuilder. Financially, though, it's also a shrewd move, given the rising demand for housing. In this sector, Berkeley Group (BKG) is a good choice, not only for its growth prospects but its history of returning cash to shareholders. This year, shareholders were rewarded with another 90p-per-share dividend, which leaves 90p outstanding in order to meet the first milestone of returning 434p per share by September 2015. Thereafter, a further 433p is targeted for payment by September 2018 and a further 433p by September 2021. Furthermore, the group has significant visibility over future cash flow, with cash due on forward sales up by £419m at £2.69bn. Given the strong cash generation, Berkeley hinted that this could lead to further dividend payments or a share buyback programme.
3. Medicine to make you feel better: AstraZeneca
The 'gift' of buying into AstraZeneca (AZN) is twofold. First, the income profile is similar to its main rival GlaxoSmithKline (GSK). Both sets of shares yield close to 5 per cent at the current price. But AstraZeneca's growth profile is that much more attractive, with a number of lucrative products in the pipeline. These range from diabetes to cancer drugs, but all are geared towards modern society's main afflictions - indeed, ones we might find ourselves suffering from one day. AstraZeneca's profile is also so attractive that it has started to catch the eye of larger companies looking to merge. Admittedly, this has been historically driven by tax benefits, but Pfizer admitted that it was also after Astra's line-up of money-making products.
4. Warmth, water and sewage: Pennon
Water, sewage and waste management aren't terribly exciting areas, but the businesses that provide these critical services will always be in high demand. Within the industry, Pennon (PNN) is the big star. The group operates through two businesses: South West Water and Viridor. South West Water has an excellent track record of overdelivering on price, customer service and other targets set by utilities regulator Ofwat - and that yields fat returns. The model works like this: South West Water puts forward a business case and Ofwat determines a fair return on capital and cost of capital. If the business brings it in at lower cost or produces a higher return, the money can be returned to shareholders. This year, Pennon managed 14 per cent more cost savings than expected and also won 'enhanced' status from Ofwat for its 2015-20 business plan, which means more money and a competitive advantage over peers. Pennon is also an acquisition target of private equity firms and the shares have a forward yield of 4.3 per cent.
Energy Assets
Gas smart-meter installer Energy Assets (EAS) is benefiting from a huge shift towards smart metering, sparked by government policy that every metering point in the UK must have a smart-enabled meter by 2020. This should drive strong demand for years to come. The business borrows money to cover the upfront cost of installing the meters, which cost £850 each. The customer then pays Energy Assets a rental fee each year for the life of the meter - typically 20 years - at an average of £135 a year. The company installed around 20,000 meters last year to take its portfolio to 101,000 and is set to add even more this year, thanks to recent major contract wins. It has been growing sales and profits in high double-digits for years, but recurring revenue prospects remain just as strong, if not stronger. There's potential to expand into a multi-utility service provider, too, having acquired electricity specialist BGlobal Metering in April. A forward PE ratio of 17 looks reasonable when set against forecast earnings growth of more than 170 per cent in the three years to end-2016 and the much higher rating at peer SmartMetering.
5. Clothes: Sports Direct
If you've got kids, you've probably shopped at Sports Direct (SPD). The stack 'em high, sell 'em cheap strategy, coupled with a generous employee bonus scheme, has worked wonders for this retailer and helped it to consistently smash challenging growth targets. And this looks set to continue. True, founder and chairman Mike Ashley is a bit of a controversial figure in the City and somewhat of a loose cannon, but there's no denying he's a savvy businessman. Sports Direct will continue to grow across the UK and Europe and a big launch in Australia and New Zealand is imminent. Last year's results were great, and we expect 2015 to be equally strong. What's more, the shares have de-rated this year, so are certainly worth snapping up.
6. Food: Booker
We debated whether or not to include a supermarket in this list, and decided that we just couldn't stomach it. But within the blighted food retail sector lies a hidden gem: Booker Group (BOK). Yes, Booker is a large cash-and-carry wholesaler, but it's also a major caterer to leisure outlets, restaurants, cafés and pubs. Next time you're at the movies or in a café, the food you're eating might very well have come from Booker. That corner shop down the road - branded Premier - that's a Booker brand too. So, while the group might not be the most exciting business on the stock market, it's all around us and it's a steady one, with a competent management team, dead set on solid, long-term sustainable growth. That much was clear from the first six months of this year, when Booker reported robust results - despite the well-documented problems plaguing the wider food retail sector, operating profit was up 15 per cent. And, following a special dividend payment of 3.5p a share in July, Booker plans to pay out a similar amount to shareholders in July next year. It has a history of generous shareholder returns and has a cash-rich balance sheet. As we've said before, this is a stock that remains enduringly attractive.
7. Fun fun fun: Disney and Entertainment One
Investors will be familiar with Disney (US:DIS), which has warmed the hearts of children with its toys, films and theme parks for more than 90 years. But they may not know that shares in the mouse house could be the perfect gift for little boys and girls this year.
Disney boasts a diversified business and an unmatched catalogue of characters. Its smash-hit films include The Lion King and more recently Frozen, and it also owns Marvel, Lucasfilm and Pixar, the studios behind The Avengers, Star Wars and Toy Story respectively. Other offerings include ABC Television Network, major sports channel ESPN, the Disney stores, computer games and more than 50 theme parks and resorts worldwide.
Importantly, all five of Disney's divisions are performing well. Operating profits at its studio business more than doubled to $1.5bn (£0.96bn) in the year to 27 September on the back of Frozen's box office success. They surged a fifth at its theme parks division due to higher guest spending and attendance in the US, and 22 per cent at its consumer products segment, thanks to strong Disney Store sales and a surge in licensing revenues from sales of Frozen toys and clothing. The company's cable and broadcasting business, home to shows such as Modern Family, benefited from higher advertising revenue at ESPN and the success of A&E Television Networks. And its interactive segment posted a maiden annual profit thanks to Disney Infinity, a console game that lets players transport store-bought Disney toys on to their television screens.
Given those gains, it's no surprise that analysts at Morgan Stanley expect annual sales and cash profits to grow by an average of 6 per cent and 8 per cent, respectively, over the next three years. Disney's shares have climbed a third in the past year to $93 - 20 times forecast earnings of $4.74, falling to 17 times earnings in 2016. That's not cheap, and the yield is a less-than-magical 1.2 per cent. Nonetheless, we think a premium rating is justified by Disney's strong growth profile, the breadth of its operations and the power of its brands. Give the gift of long-term value this Christmas.
Another child-friendly stock worth looking at is Entertainment One - home of the much-loved Peppa Pig. The group produces and acquires television content, films and music which it distributes across the globe. It's a well-diversified business, which helps keep profits stable. For instance, last summer the group bombed at the box office, but gains in the TV division - a key driver of future growth - helped profits rise by 31 per cent. Management expects upcoming releases, including the latest instalment of The Hunger Games, to revive movies. The shares have been star performers for years, but still trade on just 14 times forecast earnings, which looks reasonable against the stellar growth prospects.
8. Movies: Cineworld
Another stock that could resonate with young'uns is Cineworld (CINE). Its game-changing acquisition at the beginning of the year is finally starting to settle in, and in the meantime the new management has succeeded in making sure the existing business outperforms most of the UK market (which is currently in decline). A string of new releases is set to boost growth before the year-end and most of the expansion plan is focused on eastern Europe - a fast-growing market for cinema-goers. This would be an interesting stock to hold at the same time as Entertainment One, which is responsible for the production and distribution of many of Cineworld's strongest film releases.
9. Toys: Mattel and Hasbro
What better way to get kids interested in stocks than to buy shares in companies that make their favourite toys? Mattel (US: MAT) and Hasbro (US: HAS) are two such businesses. Both are listed in the US and are solid long-term investments. Luckily, the shares aren't particularly expensive either - and, at the moment, boast decent yields. Mattel is home to all things Disney. It also makes Barbie, Monster High, Hot Wheels, Polly Pocket and Fisher-Price. The shares yield around 5 per cent, which is huge for an American stock. Hasbro's brands include My Little Pony, Monopoly and Transformers. But it also produces TV programmes, based on its brands, which it distributes across a range of platforms, including, crucially, Apple's iTunes and Netflix. Digital gaming is another feather in its cap.
10. Tractors, lorries and diggers: BHP Billiton
Given existing pricing trends for its two principal commodities, an investment in resources giant BHP Billiton (BLT) would certainly constitute a contrarian play. And while we can't rule out any further near-term volatility, BHP's investment horizons stretch to decades. Skittish stock market investors are shaken out of the market during commodity price downturns - a young child wouldn’t be overly concerned about the VIX index.
BHP's share price has retracted as worries intensify over the trajectory of iron ore and iron-ore prices - both of which are at multi-year lows. But commodity plays are routinely oversold when markets bottom-out and we think that BHP - which is now yielding around 5.6 per cent – is no exception. Under Andrew Mackenzie's stewardship, BHP is focusing on maximising value and shareholder returns. As part of that commitment, the priority is "to at least maintain or grow our progressive base dividend in every reporting period." We back the group's ability to maintain rates well above the FTSE 100 average over the long haul.
11. Eating out: The Restaurant Group
Over the past few years, Restaurant Group (RTN) has proved it's a quality business. It has continuously traded at quite a high premium, but as this has rarely weakened we take it as an indication of the company's track record for consistent growth. Peer Prezzo was bought out this year by a private equity firm and with famous chains PizzaExpress and ASK also in the hands of private equity, it might only be a matter of time before someone snaps up the Restaurant Group. Unlike the other brands, a portfolio of restaurant chains means it isn't over-reliant on one marketing ploy. And its lucrative positions in, and close to, cinema and shopping complexes maintains the necessary footfall for growth without having to rely on massive discounting.
12. A dynamic duo: Merlin Entertainments and Secure Income
Merlin (MERL) is a relative newcomer to London. The group owns the popular Legoland brand, as well as a number of other attractions including Madame Tussauds and the London Dungeon. These are all popular sites with children, some of which are educational, and kids will be thrilled to know they've got a stake in some of their favourite attractions. But there's also a long-term growth story at play here. Most of Merlin's growth is abroad, particularly in the Far East, where it's opening new sites in Korea and Japan. Management has also proved it can weather the storm - literally. The group had a disappointing set of results in June thanks to the Polar Vortex in the US, but managed to turn it round, posting a bullish trading statement just weeks ago. You'll also be pleased to know that shareholders get a 40 per cent discount off annual passes in the UK.
And alongside Merlin, we've found a company that would really complement the stock: Aim-listed real estate investment trust Secure Income (SIR). The Reit offers protection against inflation by generating long-term income from tenants across its 28-strong freehold property portfolio, valued at roughly £1.46bn. Among these tenants are Merlin and Ramsay Healthcare. Moreover, Secure yields a tidy 6.1 per cent.
