In a recent post, I wrote about the incredible returns that can be achieved by being a long-term shareholder. But finding stocks that can actually survive 20+ years is trickier than it sounds. Back in the 1950’s, corporations in the S&P 500 had an average lifespan of 61 years. Finding long-lived stocks wasn’t a problem then.
However, in recent years the life-expectancy of publicly traded stocks has diminish significantly. According to one study on corporate longevity, companies in the S&P500 now have a lifespan of merely 18 years.
This means it’s getting harder and harder to find those “long-term” winners. Why is that?
Well, there’s a lot of things can go wrong over time — some firms merge or get bought-out, some go bankrupt, and others simply get delisted from the index. But change is probably the biggest killer of corporations over a long time period. Capitalism is always changing, and technology and consumer habits are always changing.
In order to survive for 20+ years, a stock has to be willing (and have the resources) to successfully embrace that change.
Selecting Stocks For The Long Term
So how does an investor select stocks that will live long enough to provide great shareholders returns? Well, it’s a tricky proposition because the world is going to see a lot of change over the next 20 years. There’s a lot of things that can go wrong.
On one hand, any company that’s dependent on maintaining a technological lead is likely going to encounter difficulties over time. I don’t care if it’s Google, Microsoft, Facebook, Apple, or any other hot tech firm — maintaining a technological lead over competitors for 20 years is HARD. New technologies are always being invented, and it’s anyone’s guess who’s going to be on top 10 or 20 years from now.
Another thing I try to avoid is stocks with lots of debt and large dividend payout ratios. Inevitably recessions do occur, and making those big debt payments (or dividend) payments becomes an onerous task for companies on the financial edge. In order to adapt over time, companies must be in extremely good financial shape to make big changes to their business.
Generally speaking, commodity companies have difficulty surviving for long periods of time. If a company sells bricks that look and act just like a competitor’s bricks, maintaining any kind of pricing power is going to be impossible. Firms that have the ability to set their own prices are much more likely to maintain profitability over time.
Most importantly, these companies need to provide real value to customers. It can’t be marketing, hype, and balderdash. Often this means being the lowest cost provider, offering unique services, or being the most efficient firm around. Whatever the case, if the company doesn’t provide good value to customers, capitalism will surely find a way to replace it.
It’s with these problem ‘areas’ in mind, that today I decided to showcase 5 stocks I think an investor might want to hold for 20+ years. Firms that will manage to endure, survive recessions, change with the times, and eventually compound value for shareholders.
Read on to find out the stocks I believe will be long-term winners!
Is there a more solid business than Berkshire Hathaway (Symbol: BRK-A)? Berkshire is the business that Warren Buffett “built”, and in many ways it’s part of the foundation of corporate America.
While Berkshire is known for being a far-spanning conglomerate, the 4 largest businesses are: insurance (in the form of National Indemnity, General Re, and Geico), freight shipping (through BNSF railroad), energy (via Berkshire Hathaway Energy), and manufacturing (many and diverse products).
Each of these major businesses is at or near the top of each of their respective industries, and are irreplaceable (in many ways) to the customers they serve around the globe. It’s a cinch to say that most of Berkshire’s business will be around in 20 years. We will still need energy, efficient ways to ship things around the country, and insurance to cover unexpected losses.
That said, I believe the biggest question on investors mind about Berkshire is, “What’s going to happen after Buffett is gone?”.
Part of what has made Berkshire so successful is the “cult of personality” around Buffett. Many people look up to and revere Warren Buffett. One of the biggest reasons why Berkshire has been able to buy so many incredible businesses (at good prices) is entirely due to Buffett being at the helm. This capacity will likely be diminished once he’s gone.
There might be a few rough years after Buffett is gone, but nothing is going to knock Berkshire off the tracks. Inevitably the train is going to keep on rolling, but due to it’s incredible size I believe share buybacks are going to be a more common occurrence than large business purchases.
This isn’t necessarily a bad thing, it’s just different from what existing shareholders are used to.
If there’s one thing I know about living in the United States, it’s that cars are going to be the primary form of transportation for a very long time. Along with cars, comes car insurance. It’s required by law that every driver must have insurance, and most people try to find the most affordable insurance they can.
In most cases, this is going to be Progressive (Symbol: PGR), or Geico (see earlier stock Berkshire Hathaway).
While people dream of fully autonomous self-driving cars that don’t need insurance, the reality is we’re a long long ways from the technology being widely available, and dependable enough to work in the wide variety of weather and road conditions that exist in the U.S.
At the very least, cars are replaced about every 12 years, so even if a perfect driverless car popped-up tomorrow, it would take a couple of decades before all non-driverless vehicles could be replaced.
It’s safe to say that insurance providers like Geico or Progressive are going to be in business for a very long time providing car insurance for drivers. Their position in the insurance industry is cemented by the fact that Progressive and Geico are the low cost providers for car insurance. With very low prices, they’re slowly taking market share from competitors.
Even if the need for car insurance declines over time (and I’m not convinced that it will), Progressive is slowly diversifying into other forms of insurance like specialty, commercial, and property insurance. This is just a small part of Progressive’s overall business, but it’s the fastest growing piece. Given enough time, Progressive should become more diversified over time.
Couple that with low debt levels and steady (not to mention profitable) underwriting, it’s tough to imagine any scenario that could unseat Progressive over the next two decades.
JP Morgan Chase
The future, no doubt, is going to look a bit different, but some areas of the future are going to look a lot like the past. The use of money as a transfer of value between individuals is unlikely to change in the near future. People will always have a need to store, transfer, borrow, and invest money.
Banking is one of the worlds oldest businesses that provide these services, and J.P. Morgan Chase (Symbol: JPM) has been in the banking business since 1799. It also happens to be the largest U.S. bank by assets ($3 trillion in assets) and one of the most “fortress like” large banks in the United States.
With incredible management in the form of Jamie Dimon, JPM is also conservatively managed. It literally breezed through the COVID-19 pandemic with nary a scratch.
Economies of scale have also allowed JPM to make large technology investments, which allow them to change along with the times. They’re already ahead of the game when it comes to branchless banking and doing most banking by phone apps. Unless JPM does something incredibly stupid, it’s hard to imagine a world where JPM doesn’t survive for the next 20 years.
Sure, there’s scenarios where rabid enthusiasts believe that bitcoin or some other electronic currency is going to rewrite the financial landscape of the world, but I believe this hype is overblown. Banks will simply conduct business in whatever currency is legal and popular.
The only hiccup in this stock idea is growth. JPM is already king of the banking hill, so it’s hard to imagine growth rates exceeding 10%. Thankfully, they have a sizeable dividend to reward shareholders, and steady share buybacks should slowly compound value for shareholders.
This is definitely one for investors to pick up “on a dip”, when the stock occasionally gets cheap.
Costco (Symbol: COST) might seem like an odd pick for a business to survive for the next 20 years, because retail is an usually harsh sector of the business world. Customers simply flock to whomever sells goods the cheapest.
The good news is that Costco has efficiency and being a low-cost provider built into it’s DNA. Unlike other retail businesses, Costco never marks-up products 15% over their wholesale costs. This makes for slim profit margins (2%-2.5%), but builds a reputation with customers for being the lowest price around.
Certainly, some retailers (both online and offline) will use a “loss leader” strategy to drive traffic, but those cut-rate deals don’t usually last for long. This ensures that customers will eventually come back to Costco to get the lowest price around.
Costco is also on very stable financial footing — with reasonable debt levels, and a low dividend payout ratio (30%). A recession or a crazy competitor selling at a loss is unlikely to wipe-out Costco anytime soon.
Unlike Amazon, Costco isn’t meddling around in new and different business models. They’re not making movies, or selling web services. They’re simply replicating the existing business model that’s been so successful in the United States to the rest of the world.
By all accounts the business model seems to be working too — With over 230 stores outside the U.S., Costco is growing steadily in many new markets. Even difficult markets like China — Costco has now opened their fourth store in China, with another soon to follow.
In my mind, the biggest challenge for Costco is the shift to online retail. Costco certainly has an online presence, but not all the products they sell in the store are available on the website. Like a couch, or a mattress (for example). These and other “local” items customers are required to go into the store to buy. This inconvenience, and the fact the online version of Costco has expensive shipping costs makes me think they’re not trying to be a direct competitor to Amazon. (Which is probably a good thing.)
Differentiation, efficiency, and extremely low prices are going to be the key to Costco’s survival. So far, these three components Costco seems to have in spades.
United Parcel Service
In a world that’s becoming increasingly global and connected, the need to ship small, large, and even odd-sized packages from place to place is an ever growing need. United Parcel Service (Symbol: UPS) with annual revenue over 89 billion is undoubtable one of the leaders in this industry.
But can UPS survive and thrive for the next 20 years?
Globally there is competition from the likes of Fedex, DHL, and a few other global shipping firms… but essentially this industry operates as an oligopoly. Meaning, only a few firms manage to operate in this space, and those that do so are highly profitable. This is unlikely to change in the near future due to the vast resources (fleets of vehicles, aircraft, distribution centers, and so on) required to effectively compete. UPS lists over $63 billion in assets in their financials, with most of those being in property plant and equipment.
One thing I don’t like about UPS is its hefty dividend payout ratio — about 70% of net income is distributed to shareholders as a dividend. Debt levels are also a little higher than I’d like to see, but UPS has higher profit margins than competitors, which means those interest payments are likely manageable.
With so few players in the global parcel shipping space, there will likely be a spot at the table for UPS 20 years from now. Reasonable levels of growth are expected for the shipping industry (3%-10%) in the near-term, which should translate into some decent shareholder returns as UPS grows.
Unfortunately the bulk of UPS’s shareholder returns will come in the form of dividends, which are not ideal for compounding shareholder value. Shareholders could potentially be better served by UPS reinvesting in itself to improve profitability or grow revenues. This could be the case in the future.
For now however, this is one stock I’d definitely wait for large share-price drop before I invested.
A Word About Valuation
If you’ve made it this far into the post, your probably wondering why I haven’t said a word about valuation. After all, the price at which you buy a stock partially determines your returns. This is especially true in the short term, but in the much longer term (say 10+ years) your entry price isn’t nearly as important as if the stock can compound value at a good rate of return.
Over a long enough holding period, your stock returns should roughly match that of the stock’s ROE.
In most cases, to buy one of these “20 year” stocks, you’ll have to pay-up considerably. None of the stocks in this post are what I would call “cheap”. You’re definitely paying for quality with these stocks. Be prepared for some sticker shock.
But that’s not necessarily a bad thing if you intend to hold for a extremely long time. Time is good at fixing errors in valuation that investors might make. You just have to be extremely patient.
Know any more “20 year” stocks? I’d love to hear about your top 20 year stocks in the comments!