After a period of doom and gloom, UK equities are trading at record highs, and investors are witnessing a fresh round of mergers and acquisitions. Excitement has re-gripped the Square Mile, and patient investors stand to benefit.
Buying a share of a company essentially means buying a share of its future. Understanding the quality of a stock before investing is critical. The best companies will have a long-lasting competitive advantage, a balance sheet that demonstrates responsible capital allocations, and a steady and trustworthy cash flow.
For investors in it for the long haul, Morningstar analysts say investing in stocks of companies with these qualities will offer a much more advantageous position than chasing short-term market fluctuations, or a short-lived boom of a low-quality business.
With that in mind, here's what to know about finding these "best" companies.
How Did we Select the Best UK Companies to Invest in?
A pillar to a company's success lies in its competitive advantage, or "economic moat," as famously coined by Warren Buffett. Morningstar analysts built on this idea, rating a company as having a Narrow, Wide, or no Economic Moat. This list of best UK companies to own is comprised of only companies with a wide economic moat, meaning their competitive advantage is strong enough to last at least 20 years.
Predictable cash flows are key to our analysts' ability to estimate how much each business is worth and feed into the Morningstar Uncertainty Rating. The Morningstar Uncertainty Rating ranges from low to extreme, capturing analysts' confidence levels when assigning Fair Value Estimates. Lower uncertainty implies greater resilience to risks, such as sales sensitivity to economic fluctuations and product concentration. The UK stocks listed below have been screened to only include those with low or medium uncertainty levels.
Last but certainly not least, a company's capital allocation is evaluated considering investment strategies, balance sheets, and shareholder distributions. The Morningstar stock capital allocation rating looks at these factors from a shareholder perspective and a forward-looking basis. The list below only includes UK companies with standard or exemplary capital allocation.
British American Tobacco (BATS)
• Analyst: Kristoffer Inton
• Sector: Consumer Defensive
• Industry: Tobacco
• Morningstar Rating: ★★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
One of two tobacco companies on our list, British American Tobacco is neck-and-neck with Phillip Morris International (PMI) to be the largest listed global tobacco company. This Wide-Moat Stock is undervalued, trading well below its fair value with a price to fair value estimate of 0.63.
"British American Tobacco is the world's second largest tobacco company by volume, with cigarette sales to over 180 countries," says analyst Kristoffer Inton.
"But with global cigarette consumption declining about 5% per year, BAT has invested in several next-generation products that can deliver nicotine with reduced risk."
Diageo (DGE)
• Analyst: Jelena Sokolova, CFA
• Sector: Consumer Defensive
• Industry: Beverages - Wineries & Distilleries
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: Standard
This undervalued winery and distillery stock trades at £25.91 per share, below its Morningstar Fair Value Estimate of £31.00. Diageo owns globally known brands like Captain Morgan, Smirnoff Vodka, and Casamigos.
"Diageo was created in 1997 following the merger of Grand Metropolitan and Guinness. Mergers and acquisitions remain part of the firm's DNA, and subsequent transactions – some transformative, others bolt-on – have established Diageo as a global industry leader," says analyst Jelena Sokolova.
"Although the industry is fairly concentrated (we estimate a fourfirm concentration ratio of 0.6, above many other fast-moving consumer goods categories, including the global brewing industry at 0.5), we believe there is more consolidation to come. Outside the top five firms, the industry is highly fragmented, and regional players often dominate in niche product categories or local markets. These firms present a new wave of merger opportunities for the industry consolidators, including Diageo, to grow their developing markets footprint."
Imperial Brands (IMB)
• Analyst: Kristoffer Inton
• Sector: Consumer Defensive
• Industry: Tobacco
• Morningstar Rating: ★★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
The second tobacco company on our list, Imperial Brands is currently 30% undervalued, trading at £20.43, while we think it's worth £29, making it a 5-Star rated stock to invest in.
"Imperial Brands is in the middle of a five-year strategic plan launched in 2021 that looked to position the firm as a fast follower in next-generation products while strengthening its share in its most important markets," says analyst Kristoffer Inton.
"This makes sense, given its relatively smaller size to peers like PMI and BAT, which leaves it less financial capacity to lead innovation. Although this means Imperial will be more exposed to cigarettes, it also implies that it can maximise its free cash flow generation and returns to shareholders."
Reckitt Benckiser Group (RKT)
• Analyst: Diana Radu, CFA
• Sector: Consumer Defensive
• Industry: Household & Personal Products
• Morningstar Rating: ★★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Reckitt's wide-moat stock in the large blend space offers a bargain at £44.42 per share. The household and personal products company owns well-known brands like Lysol and Mucinex.
"The majority of Reckitt's portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene," says analyst Diana Radu.
"The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition – a segment with substantial pricing power. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain, especially given the ongoing premature infant fomula litigation in North America.
"At the same time, we expect that further secular declines in birthrates in the US will continue to be a drag to the company's mid-single-digit growth ambitions."
Unilever (ULVR)
• Analyst: Ioannis Pontikis, CFA
• Sector: Consumer Defensive
• Industry: Household & Personal Products
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: Standard
Unilever is another household and personal product company, trading close to the Morningstar fair value estimate of £44. Its brands include Knorr soups and sauces, Hellmann's mayonnaise, Axe and Dove skin products, and the TRESemmé haircare brand.
"Although Unilever exhibited strong top-line performance during the coronavirus, the primary factor behind this was pricing in response to inflationary pressures and low demand elasticity in key categories," says analyst Ioannis Pontikis, CFA.
"While we anticipate pricing to remain a driver of top-line growth in 2024 and beyond, its impact should diminish in subsequent years. As the company shifts focus toward volume growth and mix, we expect organic growth to decelerate below 4% by the end of our explicit forecast period."
London Stock Exchange Group (LSEG)
• Analyst: Niklas Kammer, CFA
• Sector: Financial Services
• Industry: Financial Data & Stock Exchanges
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Exemplary
The London Stock Exchange group is rated as exemplary for their capital allocation. This stock operates in the financial data and stock exchanges industry, and is currently being traded at its fair value of £96 per share.
"The London Stock Exchange Group, or LSEG, has doubled down on its market data and analytics strategy. After the Refinitiv acquisition, the new group is now vertically integrated from pretrading data and analytics over trading venues down to post-trade clearing and reporting, albeit dominated by its data business," says analyst Niklas Kammer, CFA.
"Importantly, its assets form a strong symbiotic relationship wherein intellectual property generated within one strengthens the offering of the other, inducing demand for the group's services."
AstraZeneca (AZN)
• Analyst: Damien Conover, CFA
• Sector: Healthcare
• Industry: Drug Manufacturers - General
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Exemplary
AstraZeneca sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, immunology and rare diseases. Its 3-Star rating reflects its current value being priced fairly, at £124 per share.
"Following a pipeline review of AstraZeneca's late-stage pipeline, we are increasing the long-term projections for several drugs, including camizestrant (breast cancer), capivasertib (breast cancer), eplontersen (rare disease), and danicopan (rare disease)," says analyst Damien Conover, CFA.
"Based on an evaluation of the drugs' efficacy and side effect profiles relative to the competitive landscape, these drugs look increasingly well positioned to develop into significant new blockbusters for the company.
"As a result of the increased outlook for the pipeline drugs, we are increasing the firm's US listed share class to $78 from $74, but slightly reducing the local share class fair value to £124 from £125 as the changes in exchange rates more than offset the increased pipeline projections."
GSK (GSK)
• Analyst: Damien Conover, CFA
• Sector: Healthcare
• Industry: Drug Manufacturers - General
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion and is currently undervalued, trading at £16 per share.
"As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments," says analyst Damien Conover.
"The company's innovative new product lineup and expansive list of patentprotected drugs create a wide economic moat, in our opinion."
Haleon (HLN)
• Analyst: Keonhee Kim
• Sector: Healthcare
• Industry: Drug Manufacturers – Specialty & Generic
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Haleon is one of the biggest consumer healthcare companies in the world, and its wide-moat stock is trading 5% below its fair value estimate.
"Haleon is one of the largest consumer healthcare companies in the world. Over the last few years, Haleon has achieved a more rationalised operation by divesting multiple non-strategic brands, slimming down its manufacturing footprint, and dialing back the number of warehouses and distribution centers," says analyst Keonhee Kim.
"We appreciate the company's efforts to optimise its business and believe it is well established to enjoy long-term industry trends, including an aging population, premiumisation of consumer healthcare products, and growing emerging markets, that should fuel its top line."
BAE Systems (BA.)
• Analyst: Loredana Muharremi
• Sector: Industrials
• Industry: Aerospace & Defense
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Another fairly valued stock, BAE Systems operates in the aerospace and defense industry. Investors can buy a share the largest defense contractor in Europe for £13.47.
"Escalating global security concerns, intensified by the Ukraine conflict, are driving structurally higher growth in the defense market," says analyst Loredana Muharremi.
"We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects."
Experian (EXPN)
• Analyst: Rajiv Bhatia
• Sector: Industrials
• Industry: Consulting Services
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
"Experian is one of the leading credit bureaus in North America and the United Kingdom, providing the consumer information that is the basis for granting credit," says analyst Rajiv Bhatia.
"The company also provides decision analytics, marketing data, and direct-to-consumer credit products and services. About one quarter of the company's revenue is generated outside North America and the United Kingdom, primarily in Latin America and Asia.
"Along with Equifax (EFX) and TransUnion (TRU), Experian is one of the big three credit bureaus. Experian's US core credit bureau business is relatively mature and, as a result, the company has been expanding through adjacent products and in emerging markets."
Melrose Industries (MRO)
• Analyst: Loredana Muharremi
• Sector: Industrials
• Industry: Specialty Industrial Machinery
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
This industrials stock is currently trading 34% below its fair value estimate, reflected in its 4-Star rating.
"Melrose Industries is a UK-based company that manufactures engines and structures products for all major OEMs across civil and defense markets," says Muharremi.
"The company derives around 75% of its revenue from civil and the remaining from defence. In the civil market, the company operates in 90% of existing fleets in service and is a demonstrator partner in the GTF and CFM RISE nextgeneration engines for narrow-body aircraft."
RELX (REL)
• Analyst: Rob Hales, CFA
• Sector: Industrials
• Industry: Specialty Business Services
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Low
• Capital Allocation Rating: Exemplary
Having both an exemplary capital allocation rating and 4-Stars, this stock offers an attractive pick for investors looking to expand their portfolios in the industrials sector. RELX is a global provider of information-based analytics and decision tools for professional and business customers in various industries. A share of this stock is being traded at £36.08.
"RELX, based in the UK, is a global provider of business information, analytics, and decision-making tools for professionals in various industries," says analyst Rob Hales, CFA.
"It generates revenue mainly by creating and selling access to curated information databases, analytics, and journals. In addition, RELX organizes major events such as trade shows and conferences."
Rentokil Initial (RTO)
• Analyst: Grant Slade, CFA
• Sector: Industrials
• Industry: Specialty Business Services
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Exemplary
Rentokil Initial is the largest global provider of route-based pest-control and commercial hygiene services, operating in 83 countries. Rentokil's Wide-Moat stock is trading 27% below its current fair value based on our Fair Value Estimate.
"Rentokil Initial's strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localised pest-control and hygiene service markets it competes in," says analyst Grand Slade, CFA.
"The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localised geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygieneservice markets, which remain substantially fragmented.
"To this end, Rentokil Initial has completed over 200 acquisitions since 2015 – and has spent an average of £300 million on tuck-in mergers and acquisitions annually over 2018-23 (excluding Terminix) – focusing on acquisition targets that build geographic density of its customers. The late 2022 acquisition of Terminix Global Holdings was a transformative and moat-reinforcing deal, creating a new US market share leader.
"Pest-control targets remain Rentokil's top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business – the source of our Wide Economic Moat Rating for Rentokil Initial."
Spirax Group (SPX)
• Analyst: Matthew Donen, CFA
• Sector: Industrials
• Industry: Specialty Industrial Machinery
• Morningstar Rating: ★★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
Spirax Group PLC is a global manufacturer of a wide range of applications for industrial and commercial steam systems, electric thermal solutions and peristaltic pumps used across multiple industries.
"Spirax-Sarco Engineering has managed to embed its products and highly qualified engineers, who act as its salesforce, into customers' industrial and commercial processes," says analyst Matthew Donen, CFA.
"Approximately 50% of the group's sales are from recurring maintenance, with an average invoice value of £1,200, and a further 35% from small improvement projects with short payback periods. The recurring nature of Spirax-Sarco's sales has allowed the group to enjoy greater resilience through the economic cycle compared with the more cyclical swings in customers' capitalexpenditure budgets, which are dependent on uncontrollable macroeconomic factors."
InterContinental Hotels Group (IHG)
• Analyst: Dan Wasiolek
• Sector: Consumer Cyclical
• Industry: Lodging
• Morningstar Rating: ★★★
• Morningstar Uncertainty Rating: Medium
• Capital Allocation Rating: Standard
InterContinental is an attractive choice within the lodging industry, operating over 900,000 rooms globally. Its stock price is fairly valued, standing around £83 per share.
"We think InterContinental holds one of the industry's strongest brand intangible assets – a source of its wide moat – and forecast it will expand its room share during the next decade," says analyst Dan Wasiolek.
"Renovated and newer brands focused on the attractive mid-scale and extended-stay segments as well as a loyalty program of 130 million members will aid this growth. Also, the company holds a strong presence in international markets, with non-Americas regions constituting 45% of total rooms in 2023. This positions the company well for the more than one billion middle-income individuals expected to be added to the global population over the next decade.
"The company currently has a mid-single-digit percentage share of global hotel rooms and over 10% share of all industry rooms under construction. We see its total room growth averaging over 3% over the next decade, above the 1%-2% supply increase we estimate for the US industry."
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