Long-term investors can look to three ideas; dividends, megatrends and must-have products to position their portfolio for any market.
Pipeline operators and nutrient producers are in perhaps two of the strongest megatrends that will drive the market over the next several decades.
While companies producing 'must-have' products may not provide the same growth as others in the market, you can sleep soundly with reasonable cash yields and price returns.
With the S&P 500 back to making fresh highs on a five-year bull market, investors are rightly scared that a significant market correction might be on the way. Most are not naïve enough to think that they can time the market perfectly so I decided to look into stocks that investors could feel comfortable in over the long term, irrespective of cyclical ups and downs. While almost all stocks will get hit in a correction, look to those benefiting from megatrends and must-have products for investments that will stand the test of time.
Buy-and-hold is dead, long live buy-and-hold
After nearly half of the market's value was wiped out twice in less than a decade, investors have been hesitant to come back to the idea of buy-and-hold. What good is it to diligently put your money away and save if the market roller coaster sets you back to start every ten years? The indices have surged to beat pre-recession highs but many investors are still clawing back to their previous portfolio values.
As a long-term investor myself, it has been tough to stick with some of my choices but I let three ideas guide my investments and they have yet to let me down.
1) I am a firm believer of dividend-stocks. One thing that cannot be wiped out in the next market collapse is the regular cash return from these investments. Since 1946, dividends have accounted for 55% of the real return to stocks, though yields have dropped lately to just 2% for those in the S&P 500. Nearly all of the investments in my portfolio offer a yield of 3% or more.
2) While I don't believe investors can predict stock prices, there are megatrends that are playing out that will benefit certain sectors and industries. These are the trillion-dollar themes that will drive the market for 20-years or more. Year-to-year events might mean these sectors or stocks underperform in any given year, but the long-term trend should give them extremely strong growth drivers.
3) Beyond the megatrend sectors and industries, there are some products that people just can't live without. Most think of these as food and household goods but I would also add things like cigarettes and real estate to the list. Growth may not be as fast in these mature markets, but buying the best-of-breed companies will help ensure that your investment grows consistently over time.
Potash Corporation of Saskatchewan (NYSE:POT) is the world's second-largest producer of potash and the third largest of nitrogen and phosphate. Fertilizer stocks are one of my strongest megatrend bets, with about ten percent of my total portfolio in different assets. The sector has taken a hit lately on weakness in the pricing structure and record crop production, but the long-term drivers are undeniable. To feed a global population that could reach eight billion by 2020, producers will need to increase crop yield through higher nutrient use.
Revenue growth at Potash Corp. has fallen for the last two years, though it followed growth of 33% and 64% in 2010 and 2011. Sales of $7.3 billion were lower by 7.8% in 2013 but severe drought conditions in Latin America and the United States should help support sales this year.
The company increased the dividend by 19% last year and finally looks like it is committed to returning shareholder cash. Shares now pay an attractive 3.9% dividend yield. Besides the $997 million in dividend payments, Potash Corp. also bought back $411 million in shares over the last year.
Revenue is expected to plunge 8.1% this year and drive a 20% drop in earnings to $1.66 per share before rebounding to $2.03 per share in 2015. The consensus is based on a continued competitive price environment, but the risk is clearly to the upside. Uralkali had to accept a 24% price cut on China potash prices and no one will benefit from the breakup of the oligopoly pricing structure. Higher operational expenses from increased production will depress margins. Facing top-line and bottom-line weakness, companies will be forced to the negotiating table and near-term potash prices should rise.
Potash Corp. management believes that global potash shipments could improve 5% this year, as price discovery brings buyers back into the market. Even on the consensus for 2014 earnings, the shares are only trading at their five-year average of 20.7 times. Over the longer term, I think sales growth can average 4% to 5% a year and the shares should provide a strong price return, as well as the cash yield.
Kinder Morgan Energy Partners (NYSE:KMP) is the third-largest energy company in North America and the largest independent transporter of petroleum products. Energy transportation is another favorite megatrend of mine, with surging production in the United States outstripping the ability to build pipelines. Pipeline and storage companies base most of their revenue on volume, so the need to transport ever increasing production through limited infrastructure should be a strong driver for years to come.
Revenue growth surged 45% in 2013 on an aggressive acquisition program and a doubling of capital expenditures to $3.2 billion. Expectations are for 12.6% growth this year and 7.4% in 2015, though I think this underestimates the market for pipeline demand. Dividends have increased at a relatively consistent pace, increasing 8.4% last year and 7.4% on a 10-year annualized basis.
Even on the modest consensus estimates for sales growth and $2.79 per share in 2014 earnings, the shares would trade for just 26.5 times earnings at the current price per share and well-below the five-year average of 42.0 times trailing earnings. The price multiple may seem a little high until you consider the 7.3% dividend yield and 15% annualized earnings per share growth over the last five years.
Kinder Morgan recently announced that it would spend $1 billion to build and operate a 213-mile carbon dioxide pipeline through the Permian Basin and eastern New Mexico. The project could significantly boost extraction regional fields and support revenue with sales to producers. Gas injection can permit explorers to extract up to 60% of a reservoir's oil against rates between just 20% and 40% for primary extraction methods. Carbon dioxide is the most commonly used fluid because it reduces oil viscosity and is less expensive than natural gas or nitrogen injection.
Philip Morris International (NYSE:PM) controls 15.6% of the international cigarette market with some of the strongest brands in the industry. While Philip Morris may not make you rich overnight, you won't go bust on the next market collapse either. Sales fell just 2.4% in 2009 against an average sales decline of 12.9% across companies in the S&P 500.
Revenue growth has slowed in the last year to 3.4%, well under the five-year average of 4.8%. Sales should improve as the company continues to unlock markets across the developing world, especially China. Dividend growth has lagged the market, but the yield has remained more than double that of the average for stocks on the S&P 500. Dividend growth last year slowed to 9.2% and growth over the last three years has been 13.7% against an average of 15.5% across the broader market. Shares pay a 4.6% yield and, between the dividend and stock buyback, the company returned almost $12 billion to shareholders last year.
Sales are expected to be weaker this year by 4.1% with the consensus for $5.10 in earnings per share. The shares are trading for 15.2 times trailing earnings against a five-year average of 15.7 times. Earnings are expected to rebound in 2015 to $5.58 per share. This would allow for about 7% appreciation on the shares at the average price multiple, though I believe the company can beat earnings on a strong buyback program and continued growth in emerging markets.
Philip Morris EU Regional President recently commented on the adoption of the Tobacco Products Directive as a serious erosion of intellectual property rights and that the policy may strengthen the black market against the legal industry. The company has fought the directive for several years, but looks like it may come to pass. I am not so sure it matters as much as industry participants fear. The region is already a relatively mature market and growth was going to be limited anyway. The company's future lies in developing markets with sustainable revenue in the developed world.
We have not seen a correction of more than 10% since late-2011 and the markets could very well continue higher for years. Still, the memory of portfolios melting away is still strong and I would rather be in stocks that will do well even through the next recession. Investing in dividend-paying stocks offers a current return that can either be reinvested or set aside, while investing in must-have products and megatrends gives you a long-term perspective.
Disclosure: I am long KMP, POT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.