The world is constantly changing. As an investor, I sometimes try to think of macro-economic trends and what the world might be like in 25 years. Sometimes it is easy to get caught up in chasing the current "hot" stock, or letting day to day market news influence your decision making. I believe that building smart (not buying at a premium) positions in companies that represent the world of tomorrow - can provide wonderful returns and prosperity in the long term.
To invest with a 25 year time horizon, I am interested in companies that provide organic revenue and earnings growth due to an increasing population. The world population is expanding by 200,000 people a day. Everyday the consumer markets are growing, providing increased opportunity for companies that serve the general needs of people.
I want to pick stocks from sectors that will resist the uncertainty that a long time horizon brings. I also want to invest in companies that have a positive outlook moving forward. I want to invest in companies that through a sound business model, can increase their dividends substantially over time.
Energy: ConocoPhillips (COP)
"Big Oil" has been a lucrative investment for decades. The last few years there has been a bit of speculation about natural gas, and a search for energy beyond fossil fuels. I believe that this speculation is years ahead of itself, and that oil will power the world for the foreseeable future. While oil is a finite resource, constant improvement and innovation in technology allows for oil to be extracted more efficiently, and from regions that weren't possible to tap into 10 years ago. There may eventually be a break through leading to an "energy of the future". I do not fear this. Companies such as ConocoPhillips will be well prepared to adapt and thrive as their cash flow, capital, and resources will be unmatched by outside threats.
ConocoPhillips is currently trading at a P/E of 10.5x earnings, and yields a dividend of 4.25 percent. While they haven't raised their dividend this year due to their overall restructuring (more on that), they have a 5 year dividend growth rate of 9.99 percent.
ConocoPhillips began a company wide restructuring in May of 2012 when they spun off their downstream operations into Phillips66 (PSX).
ConocoPhillips has begun to unload holdings with low margin, and in politically volatile areas. They have been using the proceeds to invest in higher margin projects with lower volatility. They have already made two significant discoveries in the deep water gulf of Mexico this year. At their Annual Meeting of Shareholders on May 14th 2013, they reaffirmed that the restructuring is on track and that they expect to begin growing production as well as margin 3-5 percent annually over the next 5 years.
This restructuring to encourage organic growth makes ConocoPhillips a great long term holding as oil continues to be a lucrative investment into the foreseeable future.
Consumer products are a safe haven for dividend growth investors due to the needs for food, beverage, and hygiene they serve to the world's population. The "best of breed" have existed since the late 1800s. Their earnings grow along with the population, and their house name brands provide an almost impenetrable moat.
Coca-Cola is perhaps the most well recognized company in the world. They are an icon in advertising. Their good will alone (value of intangible assets such as their brand name, etc.) as of this year is $27.4 Billion Dollars! It currently trades at a P/E of 21.3x earnings and yields 2.76 percent. They have raised their dividend for 51 consecutive years. Currently, their dividends paid are only 43 percent of their cash flow from operation activities. This suggests they have plenty of room for future dividend increases.
Coca-Cola also owns brands such as Sprite, Dasani Water, Powerade, Minute Maid, Vitamin Water, Fanta, Fresca, Smart Water, and NOS Energy Drink. They are driving their growth through the rise of the middle class in emerging markets. This will be the main driver of growth moving forward.
Coca-Cola usually trades at a slight premium. It is a company that should be bought on the rare occasion it trades at fair value or better. Coca-Cola has been providing stellar returns for decades and there is no reason to think it won't be a good investment 25 years from now.
Crest, Gillette, Ivory, Old Spice, Head & Shoulders, Oral-B, Scope, Swiffer, Tide, Dawn, Iams, Gain, Duracell, Cascade, Bounty. These brands are probably throughout your home. Every single one of these brands and more are made by Procter & Gamble.
Procter & Gamble currently trades at a P/E of 19.3x earnings and sports a dividend yield of 3.14 percent. Dividend increases are as close to automatic as you can get - 57 straight annual increases as of 2013. The company has disappointed investors the last several years with declining income, margin, and earnings per share. Recently, Procter & Gamble has begun to turn things around. They have made emerging markets a priority to drive growth, and enacted aggressive cost saving measures. They also brought back former CEO A.G. Lafley - under whom the company prospered in his previous tenure from 2000 to 2009.
Both Coca-Cola and Procter & Gamble sell world famous brands that will be purchased by a growing population in any economic climate. Their consistency in growing their dividend, and potential for growth in emerging markets make them best of breed consumer stocks for the next 25 years.
Tobacco: Philip Morris International (PM)
While some stay clear of tobacco for ethical reasons, you can't argue the success of tobacco companies relative to the "market" over the last 50 years. Due to political risks, I would be hesitant to invest in Altria MO over the next 25 years. Altria is running out of growth in the U.S. market, and cutting costs/raising prices cannot go on forever. My company of choice to invest in tobacco would be Philip Morris International.
Philip Morris trades at a P/E of 17.9x earnings, and yields a dividend of 3.75 percent. Philip Morris was spun off from Altria in 2008. They sell Marlboro cigarettes among various other brands worldwide (outside the US).
They have almost doubled their dividend in 5 years. Their product margins have grown from 40.1 percent in 2007 to 45.4 percent in 2013. While some point to their high debt load as a point of concern, those worries should be calmed. Tobacco is a very profitable business - Philip Morris Int. has almost doubled their free cash flow in the last five years. It is currently increasing at a compounded rate of 13.3%.
Philip Morris is expanding their market presence at a consistent level to drive the growth of this free cash flow. If you read through their presentation at their recent annual meeting of shareholders, you will be quite impressed. They have increased their presence in key emerging markets such as Africa, Algeria, and Vietnam. They are currently working on penetrating the Chinese cigarette market (controlled by Chinese govt.) If at some point Philip Morris were to be able to gain traction in China, the growth would be astounding. The estimated volume of Chinese cigarette consumption is 2.5 trillion cigarettes annually and growing. This represents about a 1/3 of the entire world's cigarette consumption.
These long term opportunities in emerging markets combined with the tobacco business model - can provide (in my opinion) market beating returns over the next 25 years.
Technology: Visa (V)
We live in a world centered around technology. I am hesitant to invest in technology stocks as they require innovation to drive their growth long term. Can Apple AAPL stay on the cutting edge for the next 25 years? Will people be checking their Facebook FB daily 25 years from now? It is ironic that as important technology is to our everyday lives, it is an equally risky sector to invest in long term. My play on technology is a bit different. I feel the world moving away from traditional cash. As we approach a digital age, Visa will be among the companies that benefit the most from this.
Visa is currently trading at a P/E of 24x, a bit higher than the average of the S&P 500. This is justified however, due to the immense growth capabilities Visa possesses. The vast majority of the world's transactions are still through cash. While this will be the case for some time, the percentage of digital transactions is slowly rising. As middle classes rise in emerging markets, they will "catch up" to the digital age the US is already entering.
Visa has a very unique business model. They charge a percentage of all transactions they facilitate. Also - contrary to popular belief, Visa does not issue credit to their customers like some of their competitors such as American Express (AXP). If I default on my Visa card, that is the problem of my credit card company - not Visa. One last key of the Visa business model is the fact that they charge a percentage of the transactions they facilitate. This means that as the price of goods or services rise due to inflation, the profits for Visa will stay constant.
There is some risk as Visa is currently involved in an anti-trust law suit with various major retailers over the fees that Visa and its peers are able to charge. This and other threats of regulation such as govt. interference will always be a potential problem and bears due diligence should any situation arise. Any regulation could potentially affect the profits of a company such as Visa.
Consumer Health: Johnson & Johnson (JNJ)
As the population increases, and the life expectancy goes up - there will be opportunity in health care. There are many micro-cap drug companies and such being invested in as speculative plays. I don't want to chase the next "big thing" as this would not serve my purpose of increasing wealth consistently over time. I would like to invest in companies that have a history of increasing dividends, as well as possess the resources to spark growth in the future. I feel Johnson & Johnson provides me the best exposure to my preferences as a "best of breed" company.
They sell various products through their Pharmaceutical, Medical Device/Diagnostics, and Consumer divisions. They Johnson & Johnson currently trades at a P/E of 23x earnings, and has a dividend yield of 3.13 percent. Johnson & Johnson is a dividend stalwart that has raised their dividend 51 years running.
Johnson & Johnson is a force in all the markets they participate in. Their medical device and diagnostics division was the biggest in the world last year with $27.4 billion dollars in sales. The pharmaceuticals division was 8th in the world last year. Johnson & Johnson has the resources to keep their pipeline busy with new products as patents for existing drugs expire. The enticing thing about a company such as Johnson & Johnson is their immense capital resources. While now a mature company, they have the resources to grow through acquisitions, and innovation through research and development.
The Bottom Line:
When I think about the future of our world, I see a rising population that will consume increasing amounts of food and energy. I see a population that is living longer and needs health care. I see a world becoming more and more paperless and technology oriented. By focusing on the companies fulfilling our needs of the future, you can grow and prosper over the next 25 years.