I am in the process of transitioning my portfolio, such that the core will be made up of a few ETFs. I've written about this process in the past, and how the full conversion will take a while to complete. Once complete the portfolio will have a small group of ETFs, and a small group of deep value (swing trade) stocks, and a small group of long term holdings. Check out this post if you want to read about the proposed allocation. Today, I'd like to list five of my long term holdings...and why they are included in this group. The premise for these holdings are that they are fantastic companies, and will be held for at least 20 years. Time will tell how that thesis plays out, but I think it likely these companies will continue to work hard and put our capital to good use.
Union Pacific (NYSE:UNP)
What's new to say about an American industry that is now almost 200 years old?! In the mid 19th century the railroads were "the growth industry" in America. The reality is that goods need to be shipped, and the railroads are one of the most efficient ways to do that. Part of the moat protecting Union Pacific is the fact that reproducing their network of track and terminals would be cost prohibitive. As a result of the company's entrenched status and infrastructure network, this company is well positioned to take advantage of current economic activity...as well as any future growth. Much has been said lately about the reduction in tons of coal and tankers of oil that Union Pacific shipped in 2015, but I believe there is also another side to this coin. Yes the reductions have hurt profitability, and I agree US coal is a declining industry, but I believe the tanker loads of oil will increase again. I think the silver lining to the lower price of WTI is that it decreases the likelihood that new oil pipelines will be planned and built in the near term. With the railroad's infrastructure already in place and oil prices remaining volatile, I believe Union Pacific (and their competitors) have a leg up on the pipeline to move oil from remote fracking fields to oil/gas terminals.
Last month we had the opportunity to add to our Union Pacific holdings at $70 per share, and we took it. If prices decline again, we'll add even more shares. Union Pacific shares currently sell at a price to earnings ratio of 14.7, which is a discount to the company's own 5 year average. Part of this disparity is that former year's stats include a massive number of tanker loads of oil shipped, and there is a cloudy outlook for increased oil shipments in the near term. Dividend investors will be excited to see that the Union Pacific pays a dividend of 2.7%, which is higher than both the S&P 500 and the company's own 5 year average. When the US next goes into recession, I am certain the company's earnings will take a hit...but I am equally confident those earnings will rebound when the broader economy does. See my full valuation of Union Pacific here.
I think most investors are probably familiar with Coca-Cola, and the company's range of products. This company has been plugging along selling its brands and raising the dividends for many many years. Some investors are concerned that the company will be irreparably hurt by changing consumer tastes and a newly health conscience consumer. I don't think those outcomes are likely at all. In fact, I see Coca-Cola as an inexpensive affordable luxury...with a brand that is known the world over. I think these facts, as well as the company's steady free cash flow, will allow the company to grow and prosper in the decades ahead. I actually see many parallels between the cola companies of today, and the tobacco companies of the 1970s. I believe the future for my Coca-Cola investment looks bright.
That being said, the company's shares are not cheap today. With a price to earningss ratio of 27, the company's shares are expensive...even by its own historically expensive standards. The current dividend of 2.9% is a nice and growing payout (for the last several decades actually), and it yields more than the broad S&P 500 index. At these current share prices, I am certainly not adding shares...but I will not be selling our holdings either. We began purchasing our shares during the 2008/2009 crisis, and we will be holding them for the foreseeable future. See my full valuation of Coca-Cola here.
Johnson & Johnson (NYSE:JNJ)
Johnson & Johnson is another well known global company. The company is divided into the consumer, pharmaceutical, and medical device products divisions. It controls and distributes several power powerful brands, including his Tylenol brand. Every generation or so this company has a snafu or product recall, but the sales bounce back and earning power ahead.
Johnson & Johnson's shares currently sell for a price to earningss ratio of 19.8, which is slightly more expensive than the company's 5 years average of 18.6 and the S&P 500's current average of 17.7. The current dividend yield is also decent at 2.8%, but you can look for your payout to raise in the future with more than 50 years of annual dividend raises. The current payout ratio is actually a reasonable 54% This is another company whose shares have rarely been sold for cheap, but didn't your mother always tell you that you get what you pay for. With this company I also began buying shares in the 2008/2009 financial crisis, and have not been adding shares lately. Prices wouldn't need to fall very far for me to add additional shares, but I'm not likely to sell my current holdings in the next 20 years. I expect this company's profits will continue powering on for decades to come. See my full valuation of Johnson & Johnson here.
Fastenal is probably the newest addition to my group of long term holdings. It is wholesaler, retailer, and distributor of various fasteners and safety gear. Of these five holdings, I am a little less confident of Fastenal's future. I am not typically a fan of investing in retailers, but Fastenal's management has had a fantastic track record of growth and prosperity. Since the company's inception in Minnesota during the late 1960s, the company has grown to become a nationwide retailer.
Shares currently sell at a price to earningss ratio of 27.7, which is quite a bit more expensive than the average of the S&P 500. The current price to earningss ratio is even more expensive than the company's own 5 year average, and I think it's important to note that I believe the company's growth will be slower in the coming years. The reason I mention the company's growth rate is because I believe Fastenal is beginning to approach market saturation for the core fastener business. Management has done a great job of adding additional product lines and wisely managing store growth, but it is likely that growth will slow in the coming years. Management has recently expanded into vending, and I am excited to see how the vending initiative will turn out. See my full valuation of Fastenal here.
Visa is another of my more recent additions. Unfortunately, the company's shares didn't catch my eye until the fall of 2014. Once I took a long look at the company's business model and network, I was sold. Some investors misrepresent Visa as a financial company, but it's really a credit card processing company. The company assumes no risk for customers defaulting on their monthly bills. To that end, Visa has more cards in circulation than their competitors...and those cards are taken in more places globally than their competitors. Furthermore, Visa's recent acquisition of Visa Europe dramatically increased the size of the company's network. I look for increased profits from the company as it successfully integrates the European business.
Clearly, I wish Visa had caught my eye shortly after it went public. What's done is done, but I am still optimistic about Visa's future growth profitability. The company's current price to earningss ratio is 27.1, which is much more expensive than the broad S&P 500...but the company also has much better growth expectations than the average S&P 500 company. The current dividend yield is 0.7%, but the company sports a low payout ratio and management has been increasing the dividend rapidly over the past few years. I would like to add more shares to Visa to our portfolio on the next market sell-off, but I am not a buyer at current levels. See my full valuation on Visa here.
I believe that profits, in all investing pursuits, are made when you initially purchase/invest. Never subscribing to the concept of buying an asset...and hoping it appreciates in value, I pay close attention to valuations before I buy. With that idea in mind, I am not adding to any of these positions at current prices. I do believe, however, that better opportunities (and prices) will be available in the next year or two. I am ready to both add to these holdings, and seek out additional values, when the opportunity arises. I am also confident that our current investments in these companies will grow and prosper in the coming years.
Disclosure: Long UNP, KO, JNJ, FAST, and V. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by Morningstar.com
Disclosure: I am/we are long UNP, KO, FAST, V, AND JNJ.
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.