One of Warren Buffett’s most famous quips is that his ideal holding period for a stock is forever. Naturally, there’s much more to it than that. The most important element, of course, is the sustainability of the underlying company’s business.
Do their business models enable multi-decade (or beyond) earnings durability or will they become obsolete?
Not only should their business sector be solidly and easily defensible, the company’s ability to generate cash consistently and return that cash, in some form (usually dividends) to shareholders.
It’s not hard to find these types of names. A forever stock’s company typically touches consumers on a daily basis in some form.
In fact, the best company’s have woven themselves into the fabric of their customers’ lives for decades or even a century or more.
Here are three stocks that fit the forever description and form a solid foundation in a forever income portfolio.
AT&T, Inc. (NYSE: T) — AT&T’s slogan should be “The Company You Can’t Kill.” It’s been tried. However, like some villainous beast from another galaxy in a Marvel movie, it brings itself back together, sometimes becoming bigger and stronger. Tracing its roots back to 1885, the company more or less maintained a monopoly for nearly a century until it was broken up into regional bell operating companies (RBOC) in 1982.
And while the Baby Bells slugged it out to dominate the dying wireline business, AT&T saw the writing on the wall in the infant wireless business using its financial and brand muscle to build what again looks to be an unstoppable behemoth. With the recent acquisitions of DirecTV and Time Warner (NYSE: TWX), if it has to do with telecommunications and the delivery of content via telecom, AT&T will be involved.
The numbers the company generates are nothing short of staggering: $164.4 in annual revenue, 20.4% net margins, 21.7% return on equity (ROE), operational cash flow of $42 billion, and free cash flow of $15 billion.
Best of all, investors can own this big forever income stock at a small price. Shares currently trade at $29.95 with a bargain basement forward PE of 8.5 yielding a fat 6.67%.
Southern Company (NYSE: SO) — As the ninth largest (as measured by market cap) electric utility in the world, Southern Company’s footprint stretches across the southeastern United States operating 11 regulated utilities servicing 9 million customers. Tracing its roots back to 1924, the company in its present form emerged in 1947 and has grown into the $47 billion energy giant it is today.
While environmental and sustainability issues are the major challenges facing the electrical power industry, Southern Company has a history of getting ahead of that puck. In just 13 years, the company has shifted its primary fuel use for power generation from 71% coal to 70% natural gas, nuclear, and renewable energy.
The company is also leading its peer group in revenue derived from clean and alternative energy. Currently, 30% of the company’s $23.7 billion+ annual revenue mix comes from natural gas and renewables. The renewable slice which makes up 10% comes from the company’s forward-thinking Southern Power unit which is tasked with creating and implementing renewable energy solutions on a commercial basis.
The focus on the future of power generation has helped Southern grow revenue at an impressive annual rate of 7% over the last five years. Not bad in what some would consider a mature business.
But is it? When we discuss “forever stocks” that would imply that they’re going to be around forever. Even if power generation goes home-based whether through solar or some other whiz-bang renewable source, I have a hunch that Southern Company will have a piece of it in their territory.
Recently, Southern Company shares traded around $46 dollars with a forward PE of 15.17. The steady 5.2% dividend yield has been growing at an annual clip of 3% over the last five years which is firmly ahead of the present inflation rate.
International Paper Company (NYSE: IP) — With the proliferation of email and electronic publishing over the last quarter century, it would be easy to condemn the world’s largest paper manufacturer to the ash heap of history. But those that would also be leaving a lot of money on the table.
First incorporated in 1898, IP rose to become the world’s largest manufacturer of newsprint and printing paper. However, as times changed, so did the company.
Nearly 70% of IP’s $21.9 billion in annual revenue comes from industrial packaging with the remaining third coming from pulp and printing papers. Much of the packaging segment is in the cardboard space. The online nature of retail consumption will continue to drive that trend and IP’s profits. Also, the rising middle-class populations of emerging markets will continue to drive consumption and thus demand for industrial/product packaging.
The proof is in IP’s numbers: 52.8% ROE, $1.15 billion in free cash flow, and 9.8% annual dividend growth over the last five years. Going forward, sales should grow at an annual clip of 9% with projected EPS growth of 20%. Shares are bargain trading at $44.94 with a forward PE of 8.46 and an attractive dividend yield of 4.45%.
Risks To Consider: While these deep moat companies “own” their particular spaces and have long, successful operating histories, no one is immune from some sort of black swan event. However, all three have survived and thrived through wars, economic slowdowns and upheaval as well as multiple political environments. If things get weird these are still good names to hold. Also, while the tide is turning toward value-oriented stocks, fickle investors will always chase growth. When that shift occurs, these stocks will underperform from a growth standpoint. But, we should still be able to depend on their income streams and price stability.
Action To Take: Combined, all three companies bring an average of over a century in continuous operation, deep moat positions, and solid cash flows. As a basket, these forever stocks trade at a value facing forward PE of just 10.7 and yield a blended dividend yield of 5.44% with average annual dividend growth of 5.3%, both significantly higher than the 10-year treasury yield and U.S. GDP growth. Investors looking for steady dividend income and consistent corporate operating histories would do well to buy and hold these three stocks.
— Adam Fischbaum
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Source: Street Authority