In his 1988 Annual Letter to Shareholders, the human epigram known as Warren Buffett gave what would become his most famous quote, “[W]hen we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
It’s an attractive idea. Buy a company with such a strong brand, business model, product, and management that there is nary a need to ever sell it. Such a company would also be shareholder friendly, with a strong dividend and a lengthy history of increasing that dividend—rewarding long-term shareholders without forcing them to “make their own dividend” by selling portions of the holding.
There is a very high confidence hurdle for me to call a company a “forever holding.” I want to be confident that a reader can find this post ten years from now and the same companies would be just as compelling then as they are now.
For these reasons, I am forced to avoid even stellar blue chips like Exxon Mobil or McDonalds. Things today look bright for both of these companies, and there’s a high likelihood they will be great holdings for decades to come. However, macro effects like the exponential adoption of renewable energy and the continued vilification of fast food domestically make me hesitant to “set it and forget it” on either.
But, there are three companies that I am so confident in that I expect to pass on the holdings to my children when I die, many decades from now.
My two-year-old daughter owns a Disney Princesses picture book that was published in 2014. On the fourth page is a picture with the words, “Snow White Shines Like a Star.” Snow White & The Seven Dwarfs came out 79 years ago, and Disney is still reaping dividends from just one its hundreds of cultural icons.
Such is the staying power of Disney’s unmatched and ever-expanding trove of stories and characters. It is remarkable to think, but will undoubtedly be true, that Frozen’s Elsa and Anna will be on the backpacks and lunchboxes of my great-great-granddaughters.
Disney is a company of stories. Not only the classic stories of Disney movies, but making your own stories with your friends and loved ones.
The plurality of Disney’s revenues comes from its media networks—ESPN, most notably. While the phenomenon of cord-cutting is for real, the ESPN crown jewel is undoubtedly the one channel best positioned to be sold a la carte as an over-the-top option. In fact, ESPN is the most valuable cable network to both cable subscribers and cord-cutters.
The Parks & Resorts segment is set to expand this year when Disneyworld Shanghai opens in June. And it’s no secret that lower gas prices (for as long as they will last) has a positive, direct and material effect on theme park traffic. With well over 100 million captive visitors coming through the turnstiles each year, Disneyworld and its sister parks are little more than a huge shopping mall where families feel privileged to spend their dollars.
Studio Entertainment speaks for itself. We’ve grown accustomed to Disney films hitting home runs. This year, among many others, Disney will release a new Captain America film, an X-Men film, and Finding Dory. But, wait for Summer ’17, where we’ll have the Beauty and the Beast live-action film, Star Wars: Episode VIII, Toy Story 4, and another Pirates of the Caribbean in a single four-month period.
Disney has been paying a dividend since the ’80’s. But, it still only yields 1.46%. They have been increasing that dividend by about 18% per year over the past decade, and still only have a payout ratio of 24%. There is tremendous room for growth in that dividend. Consensus analyst estimates for EPS growth are 12% per year for the next five years. Given the current low payout, consider 12% dividend growth the base case.
I give a more thorough case for Disney in my post, 9 Stocks To Plant Your Dividend Growth Tree. But, to summarize…
Disney is a global institution. Their stable of brands and properties are second-to-none. Their acquistions of Pixar, Marvel, and Lucasfilm in only the past decade should be indicative of Disney’s prowess to see potential. The cross-marketing between characters, media, parks and attractions create a veritable ecosystem that is cross-generational.
While not the most pleasant thought, Disney will outlive all of us.
Johnson & Johnson (JNJ)
Boomers jolted the textile industry in the 70’s, the auto industry in the 80’s, and home construction in the late 80’s and early 90’s. As shown in the graphic to the right, the U.S. experienced (comparatively) wild GDP swings for almost 40 years until the mid ’80’s. When the youngest boomers finally entered the workforce, suddenly (and there are certainly other contributing factors, as well) GDP growth stabilized at a healthy level for the next 15 years.
That brings us to today…
26% of the U.S. is a baby boomer. Every day, 10,000 baby boomers hit the age of 65. That will continue to happen every day for the next 14 years. Life expectancy of a 65-year-old is 84 years of age. Thanks to advances in healthcare, life expectancy since 1970 has increased by about 2 months per year. Meaning, if you’re over 65 and you don’t die this year, you’ll live two months longer thanks to advances in healthcare and technology. All that to say, we are going to have an unprecendented number of retirees and elderly living for longer than ever before.
How does this help J&J?
Persons over 65 spend 5-times the amount of healthcare than children, and 3-times as much as working adults. CNBC estimates that $1 of every $5 spent in the U.S. in the year 2024 will be on health care. The Center for Medicare and Medicaid Services estimates growth in healthcare spending by 5.8% per year over the next decade. The full impact of Obamacare put a stop to the decelerating growth of health care spending that we saw from 2010-2014. In 2015 under the full force of the Affordable Care Act, “pent-up demand” from the previously uninsured jolted healthcare growth once again above 5%. There’s essentially no end in sight.
Do you want a pure play on health care? Look to Johnson and Johnson.
J&J is more than just a band-aid company. J&J’s revenue is derived about evenly between the U.S. and internationally. J&J operates in three segments: Consumer; Medical Devices; and Pharmaceuticals.
Consumer: J&J’s consumer segment sounds like I tipped over the shelving of the medicine and personal care aisle at Wal-Mart: Benadryl, Tylenol, Motrin, Listerine, Aveeno, Neutrogena, Johnson’s, Clean & Clear, Zyrtec, and (of course) Band-Aid.
Medical Devices: Devices read like the doctor’s report when your grandma goes to the E.R. J&J’s device revenue is largely made up of orthopaedic devices like replacement knee and hip systems, and surgical devices like sutures, endocutters and topical adhesives.
Pharmaceuticals: Given that J&J is such a household brand due to its household products, its easy to forget that J&J has the eighth best-selling drug in the U.S.: autoimmune drug Remicade–which accounts for about 10% of all of J&J’s revenues. Beyond immunology, J&J has $6B+ segments in both neuroscience and cardiovascular drugs. J&J also has a ~$5B and rapidly growing oncology drug program.
J&J has increased its dividend every year for 53 years. It’s yields 2.74% and still pays out less than half its profits as dividends (payout ratio of 46.4%). J&J has grown that dividend by 7% per year over the past decade, and the consensus EPS growth estimate is 6% over the next five years. Consider that the low bar for future dividend growth.
Middlesex Water (MSEX)
Look no further than what is transpiring in Flint, Michigan to see how vital water is. We can only live for three days without it, and even drought-stricken Californians will take to the streets if you tell them to cut back on watering their lawns.
Utilities are the last legal monopoly in America, and for those private utility companies, nothing makes for a more stable, long-term investment. There are a lot of options in the utility sector, including many very good ones. You can choose electric utilities, or natural gas, or water. Given that 2015 saw the first year where solar gigawatt installations outdid natural gas, I look a bit deeper as to which utility type has the most staying power.
This is not to say that stalwarts like ConEd (ED) or Duke Energy (DUK) are going anywhere. I believe both will be very healthy investments for decades. However, unlike with electricity, water can never be a distributed generation utility. Meaning, very few will get water from their own patch of land.
Middlesex Water is one of only a handful of publicly-traded water/wastewater utility companies. It serves 90,000 customers in New Jersey and Delaware. MSEX has increased its dividend for 43 consecutive years and has a payout ratio of 61% of its earnings. That payout ratio is higher than the few other water utilities that are publicly traded, however, given the predictability of earnings, I can accept that. In fact, I prefer that. Water utilities aren’t a hi-growth business. I want earnings distributed, rather than retained.
Being a water utility, Middlesex Water’s rates are negotiated with local bureaucrats, whereby the utility embeds inflation into its customer rates and, in turn, its dividend. This is just about as sure of growth as you’ll ever see. Middlesex has increased its dividend essentially along with inflation for most of that 43 years of dividend growth. You can expect the same going forward. A perfect “hold forever” stock where you can expect a yield commensurate with the 30-year T-Bill, but you get nice principle growth on the side.
I currently own 64 stocks. You can view them all here. I have no intent to sell any of those 64 stocks. However, nearly all of those companies have some chink in the armor that gives way to risk, to uncertainty, to a scenario where long-term viability is less-than-guaranteed.
The three companies above, to me at least, have no such chinks in the armor. That isn’t to say they are immune to market, sector, geopolitical, or company risk. Every investment has risks. However, the risks for the three companies above seems to be outweighed by the high probability that they have a business model and path forward that seems generally immune to significant disruption.
For me, I will own them forever.