Our resident share expert profiles 12 stocks promising growth or income in the ‘value’ and ‘speculative’ camps.

Ferreting out growth or income stocks for a diversified long-term portfolio is not as simple as finding companies that have grown profits or make bigger payouts than average. Academic studies show very little correlation between past growth and the future. Growth persists for decades in some companies, but they are the exception.

The majority of growing companies succumb to recession, competition or strategic short-sightedness. Growth companies also attract higher prices in the stockmarket. which confusingly makes them poor investments as a group.

Companies that pay generous dividends tend to have a better record, but it’s ambivalent. A high dividend yield may be indicative of a generous dividend policy but it may result from a low share price that betrays doubts about whether a company can afford to continue paying the dividend.

For sustained growth, or sustained income, at a reasonable price, investors must look beyond growth rates and dividend yields to profitability, which is the engine of long-term growth, and value, which deter- mines an investor’s return.

By relating a company’s profit to the value of the capital it has invested its profitability we know it is investing wisely. Highly profitable companies will continue to grow and pay dividends.

As share prices rise, value has become a scarce commodity. However, opportunities exist to buy shares in businesses facing short-term challenges that shouldn’t undermine their long-term profit or dividend growth prospects.

Shares with more speculative prices often have better prospects, but must justify their heady valuations with long-term dividend and profit growth.

VALUE INCOME

MS International

In terms of its price earnings (p/e) ratio, MS International is the cheapest of our 12 selections. The engineer is struggling to come to terms with shifting naval budgets.

Although it has diversified, for example, into manufacturing petrol station super-structures, its biggest business makes naval gun systems and other military equipment. While the other businesses have good prospects, overall profits fell sharply in the year to April 2013, and the company does not expect revenues to grow for a second successive year.

But MS International is still comfortably profitable and cash-rich, and the company has not cut a dividend since 1995. It should remain a high-yielder.

Castings

Although Castings’ dividend yield is only slightly above average, the strength of the company almost guarantees the dividend will be paid. That’s all the more surprising considering the business Castings is in. It forges iron castings, primarily for European commercial vehicle manufacturers.

Although demand virtually dried up during the credit crunch and profitability slumped within the industry, Castings remained profitable and maintained its dividend, partly because of its reputation and relationships with customers, and partly because of the company’s strong finances.

Castings remains a stalwart, capable of prospering through future shocks.

Sprue Aegis

Smoke alarm manufacturer Sprue Aegis has only been paying a dividend since 2009, but its credentials as a dividend stock are bolstered by its growth prospects.

Highly profitable and without debt, Sprue Aegis has recently become the sole supplier to B&Q, British Gas and Baxi, and it’s launching a range of trade products it believes are technically superior and cheaper to manufacture than rival products that it already distributes.

The company is listed on the ICAP exchange but intends to list on the Alternative Investment Market (Aim). If it does, the shares should attract a wider following, which, combined with the prospect of profit growth, suggests capital gains as well as income.

SPECULATIVE INCOME

James Halstead

Vinyl flooring manufacturer James Halstead has raised its dividend every year since 1993, remaining consistently profitable and financially strong. Although flooring is a commodity and customers are heavily influenced by price, the com- pany has grown by manufacturing and distributing its products efficiently, and innovating solutions to technical problems for specific situations.

Although the shares are a little pricey, the dividend at this cash-rich and prudent company should be very safe.

Unilever

Committed to long-term sustainable growth, Unilever, with a market capitalisation of 32 billion, owns 13 brands that each earn more than $1 billion (610 million) a year in revenues.

It’s reduced the dividend only once in the past two decades in 2009. The owner of Magnum, Flora, Lifebuoy, Surf, Omo, Persil and Comfort, among other superbrands, is an international powerhouse selling everyday products that people buy whatever the economic situation.

The shares aren’t obviously cheap, but for the long-term investor buying for income they could still be a good investment.

XP Power

The trade-off between quality and value is an imprecise one, and although XP Power is a little pricey, the shares may well be worth it.

The company, which makes power converters for manufacturers of industrial, medical, computing, telecommunications and broadcasting equipment, has only paid a dividend since 2008, but like Sprue Aegis, its growth credentials underpin the promise of more.

Since it transformed itself from a distributor of power supplies to a manufacturer, it has earned high returns on capital despite the economic circumstances, suggesting it has a future as a stalwart capable of sustained dividends.

VALUE GROWTH

Cohort

Cohort specialises in communications and data management systems mostly for the defence sector, but also for education, space, and transport. Although Cohort has experienced falling demand for consulting because of reduced spending by the Ministry of Defence, the group has continued to grow. Despite the withdrawal from Iraq and Afghanistan, electronic warfare is still a priority and Cohort is winning contracts on long-term programmes, while exploiting non-military opportunities.

Cranswick

Originally a pig feed producer, Cranswick has grown and diversified since the 1970s, partly through acquisition. Today it supplies processed and fresh sausages, bacon, pork, gammon, ham, pastries such as sausages rolls, and a growing range of non-pig based foods. Its most significant customers are retailers, which it supplies with branded foods and their own ranges, including Sainsbury Taste the Difference and Tesco Finest.

In the year to March 2014 growth is likely to be muted by the high price of pigs, but Cranswick has demonstrated over the years that despite the buying power of supermarkets, there is money to be made supplying them.

Ricardo

Ricardo is an engineering consultancy that improves the efficiency of vehicles and power generation equipment. It supplies electric and hybrid vehicle technologies, for example downsized engines, vehicle ‘light-weighting’ and the incorporation of energy storage systems (flywheels). Although profitability dipped marginally during the recession, demand for Ricardo’s products and services remained strong.

Its strategy — to develop technology that meets increasingly strict emissions regulations and reduces the impact of high fuel prices, and in addition to diversify geographically and into new sectors promises steady growth at a reasonable current share price.

SPECULATIVE GROWTH

Asos

On a p/e ratio of 82, online fashion retailer Asos is at the far end of the speculative spectrum. It already has a near 5 billion market capitalisation that would, were it not listed on Aim, put it comfortably in the FTSE 100 .

Asos is a major force in UK and Australian fashion, and has plans to expand globally, becoming an Amazon.com for clothes. If it can continue growing profits at its recent rate of about 30% a year for more than a decade, it might live up to expectations. Very few companies do that.

Dunelm

Dunelm has been a retail success story during the most hostile period for retailers in recent memory. Competition from the internet and giant supermarket chains has not hindered the company, which has accelerated profit growth through the recession.

Dunelm sells curtains, duvets, pillows, mirrors, small items of furniture and preposterously large bean bags at prices pitched for slightly austere times.

Xaar

Profit has taken off in recent years as Xaar has developed its printhead technology and applied it to new markets, most successfully the printing of ceramic tiles. The company manufactures digital printheads for industrial printer manufacturers, often targeting industries yet to convert from analogue to digital and thereby creating a market for itself.

Once the market is established, rivals will move in — so Xaar must stay one step ahead. The rate of innovation, a harbinger of growth, shows no sign of slowing.

This feature was written for our sister publication Money Observer

Stockmarket

The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.