Picking the best companies that you can buy and hold forever, without having to check-up on them constantly, is tough. Butitsnot impossible.
Indeed,SABMiller(LSE: SAB),Unilever(LSE: ULVR) andDiageo(LSE: DGE) all possess the qualities of a successful long-term buy-and-forget investment. But what exactly are the qualities you need to look out for?
Learning from the best
Charlie Munger is Warren Buffetts right-hand man at Berkshire Hathaway, and he has built a multi-billion dollar portfolio on the belief that quality is worth paying for.
Charlie Mungers logic is simple. If you buy a good business with a great set of products, over time the returns generated from the business will stack up. As a result, even if you pay a high price for the business, youll still end up with fine results.
As Ivementioned before, key to Mungers concept is a companysreturn on equity a telling and straightforward gauge for comparing the relative profitability levels of companies. If you can finda company with a stable ROE thats higher than the market average, youre on to a winner.
It is usually the case that the companies with the highest ROE figures have a competitive advantage, wide profit margins and a strong free cash flow. These are all highly desirable criteria and, over time, companies that tick these boxes should prove to be great investments.
High returns
Figures show that SABs ROE has averaged 13% per annum for the last ten years. Over the same period, the company has generated around $2bn per annum in free cash flow from operations while book value per share or shareholder equity has more than doubled. Net income hasrisen by 140% over the past decade and SABs dividend has surged by 209%.
And shareholders have really benefited from this growth. Since 2005 SABs shares have produced a total return of around 17% per annum. A 10,000 investment in SAB made during 2005 would be worth more than 50,000 today.
Of course, theres no guarantee that this performance will continue. However,SABs leading position in the global beverage market, coupled with the companys high ROE does point to further out-performance.
Similar traits
Unilever and Diageo both exhibitsimilar traits.
Diageos ROE has averagedaround 30% per annum for the past ten years. Net income, shareholder equity, and the per-share dividend payout have all doubled over the same period. Moreover, Diageostotal return comes in at 11.2% per annum for the past decade, which would have turned a 10,000 investment into 37,500.
Similarly, Unilevers ROE has averaged 30% per annum since 2005. Additionally, over the same period shareholder equity has doubled. The company has turned 10,000 into more than 45,000 (includingdividend reinvestment) over the past ten years.
Sustainable returns
These three companies all produce some of the worlds best-selling consumer products, including Smirnoff Vodka, Snow Beer(the worlds biggest beer brand)and Knorr, plus a variety ofsoups, sauces and dressings, the sales of which are easy to predict.
Therefore, the businesses are defensive by nature and the high returns on capital should be sustainable.
After taking these factors into account, analysts here at The Motley Fool have tipped Unilever and Diageo as two of the shares that they believe you can buy and hold forever. Unfortunately, SAB didn’t make the cut.
Nevertheless, along with Unilever and Diageo we believe that there arethree other companieshave all the qualities for you to buy and hold forever in your retirement portfolio.
If you’re interested in finding out more, download The Motley Fool’s new free report entitled”5 Shares You Can Retire On“!
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
