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One UK share in my Self-Invested Personal Pension (SIPP) has raced ahead of the FTSE 100 without attracting anything like the attention Rolls-Royce (LSE: RR) has commanded.
It’s relative anonymity is hardly surprising. Rolls-Royce has had a brilliant run, its shares up 1,500% over five years. That would have turned a £10,000 stake into £160,000. It shows the potential of picking individual stocks rather than just tracking the index. One big winner can transform retirement prospects.
Rolls-Royce shares are still powering on, having doubled in the last year, but I expect the pace to slow. First-half results on 31 July showed underlying operating profit jumped 50% to £1.7bn, but this is now a £97bn company. If the shares doubled again the market cap would hit £200bn. I just can’t see that happening. Not yet.
Rolls-Royce does have some exciting opportunities, particularly in small module reactors, or mini-nukes as they’re often called. But building nuclear plants, even mini ones, is a long-term business, and relies on getting the green light from government. This leaves plenty of scope for delays, mishaps, and confusion.
I’ll continue to hold my Rolls-Royce shares, but I think investors should consider very carefully before buying, given today’s dizzying valuation of more than 55 times earnings.
3i Group is a real grower
That brings me to another star performer, international private equity and infrastructure specialist 3i Group (LSE: III). Its shares are up 362% over five years, the fifth-best performer on the index, although growth has eased 37% in the past 12 months. Those numbers aren’t as headline-grabbing as Rolls-Royce, but still impressive.
Full-year 2024 results, published in April, showed 3i delivering a 25% total return on shareholders’ funds at £5.05bn. That’s the fifth year in a row that annual returns have exceeded 20%.
I think of 3i Group as a growth stock rather than an income one, but it nonetheless increased the dividend by a bumper 19.6%, to 73p per share. Companies that increase their dividend year after year are something to prize, even if 3i’s trailing yield seems disappointing at 1.65%. Over the last 10 years, it’s increased its dividend at an average annual compound rate of almost 25%.
3i Group was set up after the war and has a terrific record, but recent performance has been transformed by the performance of its star holding, Dutch discount retailer Action, which contributed £4.55bn of last year’s total return.
The Europe-focused retailer now dominates 3i’s portfolio, giving massive concentration risk. The plus side is that Action has a proven model, recently opening its 3,000th store and making a strong start in Switzerland.
Prudent caution
Like Rolls-Royce, growth surely has to slow. These are tough times for private equity. 3i’s CEO Simon Borrows says the management team is cautious about new deals, given “uncertain” economic and geopolitical conditions.
But the management team has a brilliant track record and I plan to hold the investment trust for years, hoping it can repeat the magic by bringing other businesses to fruition once Action matures.
New investors might still consider the stock, but with tempered expectations and a long-term view. Or they could do some more digging, and try to unearth the next big FTSE 100 success story.
