It hardly matters what price you pay for a truly exceptional business in 2013; it will have created so much value by 2043 that your purchase price will not have a significant effect on your return. Therefore, investors who want to invest their savings without being a slave to the vicissitudes of the market will want to focus on buying great businesses.
Three businesses to own forever
It is no mistake that all three companies mentioned in this article own strong consumer brands. American consumers show exceptional loyalty to their favorite brands, which gives these companies significant pricing power that is unlikely to dwindle as the years pass by.
Colgate-Palmolive Company (NYSE:CL) is the world leader in oral care. Nearly one in two oral-care products sold around the globe is Colgate-branded. Colgate’s closest competitor, Crest, is less than one-third the size.
Colgate-Palmolive Company (NYSE:CL) earns high margins and has exceptional customer loyalty, affording it pricing power and protection from intruding private-label products. This has allowed the company to generate a return on capital that approached 30% over the last five years.
In addition, Colgate-Palmolive Company (NYSE:CL) is an exceptional steward of shareholder capital. Upper management has shown a commitment to investing within its moat in oral care, refusing to diversify into areas in which the company does not have a competitive advantage. Nearly half of the company’s revenue comes from its impenetrable oral-care segment, while the other half comes from strong household-product brands like Ajax, Palmolive, and Speed Stick.
Management’s devotion to markets in which the company has an unassailable advantage positions the company for long-term success. Despite being a mature free-cash-flow producer, Colgate-Palmolive Company (NYSE:CL) has experienced organic growth in the high single digits over the last decade — far outpacing inflation over the same period. If the company can keep this up, long-term shareholders will be richly rewarded.
PepsiCo, Inc. (NYSE:PEP) is another company with significant pricing power derived from brand loyalty. Although its carbonated soft-drink business is exceptional, trailing only Coca-Cola in worldwide market share, its snacks division is the key to PepsiCo, Inc. (NYSE:PEP)’s long-term value creation. The company has a 40% share of the global salty-snacks market, with brands like Lay’s, Doritos, Cheetos, and Frito’s leading the way.
PepsiCo, Inc. (NYSE:PEP)’s extensive distribution system enables the firm to serve its customers with both carbonated soft drinks and snacks at the same time. This enables the company to use its distribution system even more efficiently than Coca-Cola. No other company (besides Coca-Cola) could possibly replicate PepsiCo, Inc. (NYSE:PEP)’s distribution system economically, which gives the company ample protection from competition.
Just as Colgate-Palmolive Company (NYSE:CL) exploits its lead in oral care to earn high returns on capital, PepsiCo, Inc. (NYSE:PEP) leverages its scale and brand equity to generate out-sized profits and decent growth; the company earns close to a 15% return on invested capital and is growing faster than the U.S. economy — close to 5% organic growth each year. The company’s stable earnings, entrenched market position, and decent growth profile make it a good buy-and-hold-forever candidate.
Finally, 3M Co (NYSE:MMM) is a company that weekend investors can buy today and own forever knowing that it will continue to create value for decades to come. 3M Co (NYSE:MMM)’s brands include Scotch Tape and Post-It Notes, among other products with applications in energy, healthcare, office, and industrial settings.
Although 3M Co (NYSE:MMM) must continually innovate in order to generate additional value, the company’s massive scale and fortress balance sheet will allow it to develop or acquire innovative products for decades to come. The company is ramping-up research and development, which is expected to reach 6% of sales in 2017 compared to 5.5% in 2012 — a difference of hundreds of millions of dollars. This shows management’s commitment to long-term value creation rather than short-term window dressing.
Meanwhile, the company seeks to accelerate its international expansion to further capitalize on existing products. In 2003, developing markets accounted for just one-fifth of sales. In 2012, that number reached 34%. By 2017, management expects up to 45% of sales to come from developing markets. So, while 3M Co (NYSE:MMM)’s position in developed economies like the U.S. and Western Europe seems to be stagnant, growth in developing economies offers long-term growth potential.
Bottom line
Nobody can know what a company’s earnings will be in any one year, but we can have a pretty good idea which firms will have high earnings in any given decade. Wide-moat companies like Colgate-Palmolive Company (NYSE:CL), PepsiCo, Inc. (NYSE:PEP), and 3M Co (NYSE:MMM) will continue to generate shareholder value for decades to come, no matter what next year may hold. Therefore, investors who wish to spend just five minutes per month investing for retirement should focus on buying wide-moat companies like these.
The article Three Stocks to Own Forever originally appeared on Fool.com and is written by Ted Cooper.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends 3M and PepsiCo. The Motley Fool owns shares of PepsiCo. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
