Sustainable competitive advantages, continuing growth prospects and healthy dividends are some of the qualities that make a stock worth holding for the long run. I analyze five potential candidates and see if any deserve to be in your “forever” portfolio:
Coca-Cola Company (NYSE:KO)
Coca-Cola is world’s largest manufacturer, distributor, and marketer of non-alcoholic beverages. This is one of the companies you hear somebody bought in the 1950s and now gets the initial investment back in quarterly dividends. Coca-Cola has always performed. And for good reason; it offers great products with high margins (23.7% five-year average net profit margin) and knows how to expand globally. The question with mature companies like Coca-Cola always is whether the company can keep growing like it used to. The answer is "yes."
Looking at worldwide consumption patterns of Coca-Cola products tells the story. Today the average person in the United States polishes off 394 8 oz. servings of Coke products. Significant market penetration indeed, so how does consumption stack up globally? Mexico blows us out of the water as residents consume an average of 675 8 oz. servings of Coke products! Who would have guessed in Malta, the average person drinks 606 8 oz. servings of Coke products?The point is people everywhere like Coke products, so at a bare minimum Coca-Cola can keep growing revenue at the rate of population growth, however it gets better than that. Coke has barely entered markets in China and India. Both countries have over a billion people and rapidly growing economies. Currently people in India consume an average of 11 8 oz. servings of Coke products, while people in China consume 34. That leaves a lot of room for improvement. Couple that growth potential with Coke’s outstanding record of success and a five-year dividend growth rate of 8.65%, and KO looks like a solid ticker for our lifetime portfolio.
McDonald's Corp (NYSE:MCD)
McDonald's is a foodservice retailer that franchises and operates fast-food restaurants is 117 countries worldwide. This company is another example of a historic success that has made a lot of people rich over the years. However, past performance is no guarantee of the future. If we are looking to add McDonald's to our portfolio now, what can we expect and should we hold it forever?
For one, McDonald's has a serious competitive advantage that allowed it to have average net profit margin of 16.7% over the last five years in an industry that averaged 3.7%. Not only that, McDonald’s has some of the cheapest prices of the fast-food retailers. In terms of growth, McDonald's shows no signs of slowing down as earnings per share have grown 17.8% a year over the last five years. Much of this earnings growth is due to increased efficiency, which is really a strength of McDonald's. As for dividends, McDonald's has been kind enough to pay out 47.5% of earnings in an industry that averages a payout ratio of 34.9%. Furthermore, McDonald's has grown its dividends 27.5% a year over the last five years. Should that be maintained, dividends from McDonald's stock would double in less than three years!
While McDonald's is mature company it looks to be far from its twilight. Dominant margins, great management, and increasing dividends make this stock a good pick for the long-run.
Wal-Mart Stores Inc. (NYSE:WMT)
Wal-Mart operates discount retail stores worldwide under the name Wal-Mart and Sam’s Club. The company employs 2.1 million workers worldwide and had $405 billion in sales for the fiscal year 2010. Unlike the previous companies KO and MCD that rely on high margins for growth, Wal-Mart relies on scale. Net profit margins over the last five years averaged 3.6%, while better than the industry average of 2.9%; it doesn’t do much to fire up investors. However, the strength of Wal-Mart as an investment is its stability. It largely trades in a range of $48 to $58 a share, and has done so for the past few years. What makes Wal-Mart interesting these days is that earnings have been growing at almost 9% a year for the last five years and share price hasn’t really recognized these strengthening fundamentals. The reason being Wal-Mart’s valuation has fallen to reflect that it will not likely experience the explosive growth it did in the 1980s and 1990s in the future. This has gradually lowered the price-to-earnings ratio to 11.6, which isn’t bad for a company as well run and safe as Wal-Mart. Dividends have grown 9% a year over the past five years, making it a pretty good pick for the long haul. WMT has better international growth prospects than archrival Target (NYSE:TGT) at this point.
Johnson & Johnson (NYSE:JNJ)
Johnson & Johnson engages in the research and development, manufacture and sale on an extensive line of products in the healthcare field. This company has an incredibly diverse line of products, very strong R&D and growth potential globally. The story for Johnson & Johnson looks promising, as the standard of living in emerging economies increases, the healthcare products Johnson & Johnson offers will be become attractive. This means significant growth opportunities worldwide. Earnings per share have grown 7.4% over the last five years, compared with industry growth of 5.9%. The company pays a 3.6% dividend, which accounts for nearly 52% of its earnings. These dividends have grown 10.6% over the past five years. Definitely a model of stability and if the global growth story comes true, JNJ could be a really nice addition to the forever portfolio. We wouldn't be surprised to see JNJ announce a bolt-on acqusition such as Medtronic (NYSE:MDT) or St. Jude (NYSE:STJ) to target the profitable stent space.
Pepsico Inc (NYSE:PEP)
PepsiCo is a leading snack, food and beverage company. PepsiCo is often thought of as a direct competitor to Coca-Cola, however food and snack products make up over half of the company's revenue. While Coca-Cola is number one in the beverage market, PepsiCo has significant strengths in its own right: strong margins compared with the industry and similar global growth potential to KO and JNJ. PepsiCo also boasts a better dividend yield than KO, 3.33% versus 2.79%. Earnings have been growing at 10.4% in an industry with an average of 1.2%. While margins and competitive advantages are not as strong as KO, PepsiCo is also a good bet for the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.