Investors seeking earnings growth in an uneven market should pick up shares of ADP , Microsoft , UnitedHealth and 3M , said Eric Schoenstein, portfolio manager for the Jensen Quality Growth Fund . Jensen said payroll processor ADP benefits from leading market positions in a business characterized by extremely high customer switching costs – switching from ADP’s system to that of another vendor is highly cumbersome. This competitive advantage is reflected in ADP’s more than 90% customer retention rate. “ADP also benefits from a fee-per-transaction revenue model which creates recurring revenue and natural operating leverage,” said Schoenstein. “This combination of attributes has led to very consistent business results over the past five years- mid-single digit organic revenue growth, stable profit margins, return on equity (ROE) in the low-to-mid 20% range, and stable free cash flow.” The Jensen Quality Growth Fund is up 9.7% thus far in 2016, according to Morningstar. The $5.4 billion fund has returned an average of 11.4% annually over the past three years, outpacing 89% of its rivals in Morningstar’s large cap growth category. As for Microsoft, Schoenstein said the company’s robust free cash flow has allowed the management team to continually invest in future growth opportunities while also returning over $74 billion to shareholders in share buybacks and dividends over the last five fiscal years. He also noted that the shares currently yield a healthy 2.6%. Regarding UnitedHealth Group, Schoenstein said the insurer has posted “consistently high returns on equity” and has used its free cash flow to continue to grow its business, including strategic acquisitions, as well as to return over $18.1 billion to shareholders via dividends and share buybacks over the last five years. The dividend was recently increased by 25% and has risen five fold since 2011. Finally, Jensen is bullish on 3M, saying the diversified industrial and consumer products company leverages the company’s core expertise in material science and process technologies, then enhances this competitive advantage by combining it with strong branding. “3M has proved to be what we consider an all-weather stock,” said Schoenstein. “The company has posted average ROE more than 30% for the past ten years.”
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