What's The Ultimate 'Economic Moat' Investment?

 |  Includes: BRK.A, KO, MDLZ, PBR, PTR, SSL
by: Emerging Money

By Jonathan Yates

Legendary investor Warren Buffett has filled the portfolio of Berkshire Hathway (NYSE:BRK.A) with companies protected by wide economic moats such as Coca-Cola (NYSE:KO) and Kraft (KFT). But what kind of moats protect investors in emerging markets?

According to Forbes, an economic moat is found in "companies that have a sustainable competitive advantage over rivals."

For both Coca-Cola and Kraft, the economic moats are their brand names, along with the global network reaching deep into emerging markets and developed nations around the globe.

For emerging market companies in the oil industry such as Petrobras (NYSE:PBR), Sasol Ltd. (NYSE:SSL), and PetroChina (NYSE:PTR) the economic moats are much more substantial and much more significant for investors.

Oil industry companies have much stronger margins than a consumer goods company like Kraft. In addition, they do not have to market their product like Coca-Cola does. Global demand sets the price of a barrel of crude oil, and from that much of the value of an oil company like Sasol, PetroChina or Petrobras is set.

In addition, many brand name companies catering to consumers go bankrupt -- Eastman Kodak being a recent case. Every major legacy air carrier in the United States has gone bankrupt at least once. Major oil companies do not go bankrupt, due to the economic moat that protects each. For a major oil company the economic moat is multilayered, with the most imposing moat the cost.

Drilling for oil results in expenditures in the tens of billions of dollars. It is impossible for a startup to break into the oil business and compete; Big Oil is not social media and Mark Zuckerberg is not J.R. Ewing. This is demonstrated by the number of mergers and acquisitions that have taken place in the oil sector, not the number of of initial public offerings.

Another feature of oil companies that evince the broad economic moat of each is the robust dividend yield. The average dividend for a stock on the S&P 500 is around 2%. PetroChina has a dividend yield of 4%. For Petrobras, the dividend is 5.22% and for Sasol the dividend is 4.69%.

Sasol, Petrobras, and PetroChina are all trading below their year highs due to the declining price of oil from the global economic slump. This is an excellent opportunity for emerging market investors to add stocks with high dividend yields and wide economic moats to their holdings.