The nifty nine: a portfolio of stocks to buy and hold forever

view original post

Warren Buffett famously said that his favourite holding period for equities was “forever”. Some of your equity investments will be short- or medium-term plays; you hope they appreciate, but you will need to monitor them regularly in case they do not develop as you hoped. Longer-term investments, by contrast, should be “forever companies”: those you can hold indefinitely because they will be so reliable that you will barely have to keep an eye on them at all. 

These stocks are leaders in their sector or niche, capable of steady growth, and can withstand hard times because they have little debt or net cash. In most cases they will also produce reasonable dividends. We explore nine examples from eight sectors below.

The main selection criteria used are a record of profitable growth and rising dividends; investment in the future (through research and development, or R&D, capital expenditure and small bolt-on acquisitions); a leading position in a market sector or niche and low debt or net cash. 

Certain sectors are more likely than others to contain “forever companies”. The nine examples that follow are from a wide array of sectors to reduce overall risk through diversification. Most of the companies selected have wide “moats” – enduring advantages that help fend off potential competitors – and many are dividend aristocrats, or companies that have increased their dividend every year for at least 25 years.

Pharmaceuticals

In this sector there are some excellent companies to choose from, such as AstraZeneca, Johnson & Johnson, Novo Nordisk, Merck and Roche. We highlight three: Merck, Johnson & Johnson with its 59-year record of dividend growth, and AbbVie. Merck (NYSE: MRK) just pips Johnson & Johnson as our first choice in this important sector because of its fine record of bringing new drugs to market. It also boasts a higher dividend yield. 

For example, Merck’s cancer-immunotherapy drug, Keytruda, is the market leader in this segment and is predicted to be the world’s top-selling drug in 2026 with sales of $24bn – double those of the second-best-selling treatment.

In addition, Merck’s Molnupiravir, the first oral antiviral drug for treating Covid-19, was last week approved by the UK regulator. In clinical trials it halved the chances of hospitalisation or death among those most at risk of contracting severe Covid-19. Merck has a strong pipeline of new drugs concentrating on cancer treatments, vaccines and antivirals. 

Merck has a wide moat because of its patented drugs, economies of scale and R&D investment of $10.2bn (it is one of the four highest R&D-investing pharmas). It has maintained or increased its dividend every year since 1986. The shares have risen almost fourfold since early 2009 and the dividend yield is 3%. 

Consider also AbbVie (NYSE: ABBV) since it looks undervalued, with the market taking an overly pessimistic view of the effects of the patent expiry of its best-selling drug Humira, which tackles rheumatoid arthritis. AbbVie was the research-based pharmaceutical division of Abbott Laboratories, but was spun out as a separate company in 2013. If we include the record of Abbott before 2013, AbbVie has a 49-year record of increasing dividends. 

AbbVie specialises in immunology, neuroscience and oncology and acquired Allergan (known for its Botox treatments) in 2020 to enhance growth in neuroscience and aesthetics. AbbVie’s moat is based on its patent-protected drugs, brands, powerful sales force and annual R&D investment of $6.2bn. 

It has a strong position in rheumatoid arthritis through Humira, which has a thicket of patents running out in the US between 2023 and 2034 (for some manufacturing patents). A new rheumatoid arthritis drug, Rinvoq, has been approved with another in phase II-trials (the second of three stages of clinical trials). 

Although some imitations of Humira could be launched by other firms in 2023, their manufacturers will not only need regulatory approval, but also agreement from AbbVie about manufacturing processes. Humira’s sales will fall over the next few years, but slowly, providing time for sales of Rinvoq to rise and a number of new drugs to complete clinical trials and be approved. 

Health

US companies such as Abbott Laboratories, Intuitive Surgical and Medtronic dominate the global health sector, with Smith & Nephew being the only UK FTSE 100 example. We select Medtronic (NYSE: MDT), the largest by market value, as it has a very wide product range and the highest R&D in this sector ($2.5bn). Medtronic’s products cover cardiovascular, neurological, plus spinal and orthopaedic ailments, along with renal and nose and throat complaints. 

The group also produces advanced surgical technology. Products include the world’s smallest pacemaker, which weighs only 1.75 grammes and can be inserted by keyhole-surgery directly into the right ventricle of the heart. The battery lasts between eight and thirteen years and the device is MRI safe so the wearer can have full-body three-Tesla MRI scans. Medronic also makes the world’s smallest implantable spinal cord neuro-stimulator, which automatically delivers the right dose at the right location as the pain shifts with different body positions.

Medtronic has a wide moat because of its dominant position in patented, highly engineered devices for chronic diseases. It has increased its dividend for 43 years in a row and the shares are up by a factor of 4.3 from their 2009 level. 

Agriculture

In this field the pick of the bunch is farming-equipment specialist Deere & Co. (NYSE: DE). Deere has one of the world’s most recognisable brands and makes machinery for the agriculture, construction, forestry, landscaping, golf and military sectors. Deere’s respected brands command strong loyalty among its customers, who value its state-of-the-art products and reputation for both reliability and service through its global dealer network. These advantages, along with a $1.3bn yearly R&D investment, give it a wide moat. 

Deere is now working on a smart-industrial strategy of intelligent, connected machines and applications using artificial intelligence (AI) that it expects will revolutionise production systems in agriculture and construction. 

It acquired Bear Flag Robotics earlier this year to accelerate its fully robotic-tractor programme. It has maintained or increased its dividend every year since 1987. The shares are up almost 22 times since early 2000.

Food and drink

There are a number of well-established food companies with strong market positions, such as McDonald’s, Nestlé and Unilever, but we opt for drinks giant Diageo (LSE: DGE), given its wide product range and strong brands. Diageo is a global industry leader with a wide moat due to its scale, vast product range and very recognisable brands, such as Johnnie Walker, Lagavulin, Gordon’s, Guinness and Smirnoff. 

Almost one quarter of sales come from Scotch whisky. The requirement to age whisky for years before sale is a substantial barrier to new entrants into the subsector and sets Diageo apart from most other consumer-staples companies. Diageo boasts 23 years of rising dividends. The shares are up 9.6 times since 2000. 

Precision engineering

The UK is lucky to have some excellent precision-engineering companies, such as Halma, Renishaw and Spirax-Sarco Engineering. We select Halma (LSE: HLMA), given its outstanding record of profitable growth. Its products cover the areas of safety, health and environmental protection, and range from devices to detect gas to water-pipeline leakage and ambulatory blood-pressure gauges.

I first bought the shares at 125p in early 1999 and they now stand at around 3,000p, up 24 times. The dividend, moreover, has risen by 5% or more for 42 years. By 2020-2021, the yield on my original investment was 14.1%. Halma is a good example of a “forever firm”, providing capital growth and income. 

It also highlights another important point. If you have confidence in a “forever company”, you need to stay with it to get the full benefits. Halma’s mix of businesses has evolved over the last decade as revenue increased from £459m in 2009/2010 to £1.32bn in 2020-2021, the 18th consecutive year of record profits. Over this period the medical and environmental analysis divisions grew from 38% of revenue to 52%, while industrial safety fell from 22% to 14% and infrastructure safety fell from 40% to 34%. 

This optimisation of the product mix is a key characteristic of “forever companies”. Halma’s decentralised operating model makes it a very attractive acquirer for business owners and this helps it continue to find good, bolt-on acquisitions. 

Scientific instruments 

The UK has a number of small and medium-sized but high-quality scientific-instrument companies, such as Judges Scientific, Oxford Instruments and SDI. But we select the US company Thermo Fisher Scientific (NYSE: TMO) as our “forever company” in this sector because of its large size, wide range of products and strong position in a substantial segment of the market. It has become a one-stop shop for scientific instruments in key industries such as pharma. 

The product range covers biotechnology (genetic analysis, antibodies and gene-editing), instruments (electron microscopes to spectrophotometers), laboratory equipment (such as centrifuges) and laboratory supplies (pipettes to water testing). 

It has the largest sales force in the industry, an unparalleled distribution network, strong customer relationships and invests $1.2bn per year in R&D. These advantages give it a wide moat. It has maintained or hiked its payout for a decade. The shares are up 19 times since early 2009.

Financial services 

In financials we have a wide choice of banks, insurance companies and credit-card providers. But we favour financial-data and research group S&P Global (NYSE: SPGI), thanks to its multi-decade record in providing credit ratings (essential for bond issuance) and its key stockmarket indexes, such as the S&P500. These features give it a wide moat. S&P has a record of maintained or increased dividends going back to at least 1986. Dividends have risen every year since 2001 and the stock is up by a factor of 21 since early 2009.

There is a very wide choice of companies in software, hardware, internet and AI technology My pick is Alphabet (Nasdaq: GOOGL), Google’s parent company. Alphabet has a strong market position in addition to a record of profitable growth and innovation in launching new products such as Android, Maps, Gmail, YouTube and new businesses such as self-driving cars. 

Alphabet, through its Google subsidiary, has a dominant position in the growing online-advertising market and gained an early foothold in smartphones through its Android operating software. Its wide moat is based on its market position and intangible assets such as its brands, algorithms and accumulated data on consumers. 

Alphabet is the world’s largest R&D investor with a 2020 outlay of $27.6bn. It is one of the most advanced AI companies and acquired the British AI outfit DeepMind in 2014 (the company whose AlphaGo system in 2016 beat the world’s champion player at the complex game of Go). 

The shares are up almost 20 times since the start of 2009, but it pays no dividend, preferring to invest in share buybacks instead. Alphabet has net cash of $123bn.

Two key priorities for investors

There are two general issues to keep in mind when investing in “forever companies”: diversification and value. It is wise to hold a diversified set of “forever firms”, since even well-established blue-chips can come unstuck. 

For example, Lloyds Bank was a seemingly solid dividend stock until the financial crisis. The share price was around 393p in early 2007, but fell to 30p in March 2009 and since then has only risen to 50p. 

And while the dividend in 2007-2008 was 23.33p per share, in the dividend in 2018-2019 was still only 3.21p. Another example is General Electric, which entered the 21st century as America’s most valuable corporation only to lose its way. The shares are down from $447 in 2000 to $106 recently, with a dividend yield down from 8% in late 2009 to 0.3% now.

The second issue is valuation. Given the quality of the nine “forever companies” described above, one would not expect them to be selling at bargain prices, and indeed none of them are. Since stockmarkets in most developed countries, especially America, are currently at high price/earnings (p/e) ratios compared with historical levels, with the US market particularly exalted, one strategy would be to wait for the next general market decline and then invest in several “forever companies” at lower prices. 

However, markets can often stay high for longer and even move higher, despite pundits predicting a fall. The safest strategy is usually to feed funds into the market slowly using Isa allowances and look first at the stocks with lower p/es. We will therefore give the p/es and dividend yields for each of our companies together with comments on growth records and leave investors to decide how and when to invest. 

In terms of revenue growth, the leader is Alphabet (revenue rose by 102% between 2016-2020), followed by AbbVie (79% between 2016 and 2020), Thermo Fisher (76%, 2016-2020), Halma (66.9%, 2017-2021), Deere (33.7%, 2016-2020), Merck (20.6%, 2016-2020), S&P Global (12.8%, 2016-2020), Diageo (5.7%, 2017-2021, and Medtronic (1.4% 2017-2021). 

Some of the growth is organic, some by acquisition – for example, AbbVie’s acquisition of Allergan in 2020 increased its sales growth figure and Thermo Fisher has made several acquisitions. 

AbbVie has a forward p/e of just 8.4 for 2022, with a current dividend yield of 4.4%; Merck has a p/e of 12.3 for 2022 with a current dividend yield of 3%. The difference reflects the greater uncertainty about AbbVie’s ability to replace revenues from Humira in time with new drugs emerging from its pipeline. In the health sector Medtronic has a p/e of 21 for 2022, falling to 19 for 2023, along with a current dividend yield of 2.1%.

Diageo has a forward p/e of 28 and a dividend yield of 2%. Deere has a 2022 p/e of 15.5 with a yield of 1.1%. S&P Global is on a 2023 p/e of 28.2 and a yield of 0.7%. Halma is selling for 43 times its estimated earnings for 2023-2024 and yields 0.6%. Thermo Fisher has a p/e for 2023 of 27.6 with a yield of 0.16% and Alphabet a 2022 forward p/e of 26, but no dividend. Nevertheless, the company boasts net cash of around $123bn and regularly buys back shares.

  Revenue Growth Forward p/e Dividend yield
  Growth Period    
Alphabet 102% 2016-2020 26 0%
AbbVie 79% 2016-2020 8.4 4.4%
Thermo Fisher 76% 2016-2020 27.6 0.16%
Halma 66.9% 2017-2021 23 0.6%
John Deere 33.7% 2016-2020 15.5 1.1%
Merck 20.6% 2016-2020 12.3 3%
S&P Global 12.8% 2016-2020 28.2 0.7%
Diageo 2.7% 2017-2021 28 2%
Medtronic 1.4% 2017-2021 21 2.1%