What are the best qualities to look for in long-term holdings? Well, we?d all be rich if we knew exactly what the secret recipe was, but there are a few characteristics that many great investors love to see in their biggest holdings.
Chief among these are a wide moat to entry for competitors, impressive margins, steady dividends and solid growth prospects over many years. There aren?t many shares out there that tick every box on this checklist, but one that does is British American Tobacco (LSE: BATS).
The wide moat to entry in the tobacco sphere includes not only the capital-intensive business…
What are the best qualities to look for in long-term holdings? Well, we’d all be rich if we knew exactly what the secret recipe was, but there are a few characteristics that many great investors love to see in their biggest holdings.
Chief among these are a wide moat to entry for competitors, impressive margins, steady dividends and solid growth prospects over many years. There aren’t many shares out there that tick every box on this checklist, but one that does is British American Tobacco (LSE: BATS).
The wide moat to entry in the tobacco sphere includes not only the capital-intensive business of manufacturing and distributing cigarettes, but also the intense loyalty smokers have towards their chosen brands.
Customers aren’t about to switch from smoking Lucky Strikes simply because the price increased 10p a pack, for example. This gives BAT incredible pricing power, which is a large reason operating margins were a fantastic 36.8% over the past half year.
High margins play a big role in generating significant cash for BAT, which the company dutifully passes on to shareholders through annually increasing dividends that yield 3.09%.
As far as long-term growth goes, the already massive tobacco industry obviously isn’t about to take the world by storm. However, increasingly wealthy developing markets are big consumers of cigarettes and were a major reason organic volume growth for BAT was an impressive 2.1% year-on-year over the last six months.
There are obviously risks to BAT from increased regulation in the developed world, but the company has adapted to these before and I see little reason to believe this will change in the future. With growing revenue, little threat from upstarts, healthy margins and substantial shareholder returns, BAT is one share I wouldn’t mind owning until retirement.
One for good times and bad times
Another company that has earned its place in many retirement portfolios is consumer products giant Unilever (LSE: ULVR). Like BAT, Unilever’s wide moat to entry is filled with household names that consumers buy in good and bad times alike, such as Dove, Lipton, and Ben & Jerry’s.
Selling goods to which consumers have a personal connection ensures both stable revenue and enviable pricing power. The ability to charge high prices and a strong focus on operating costs led to operating margins of 14.4% over the past six months.
This is a decent result for a consumer goods company, but offers significant room for improvement. Unilever is already working on this by shifting away from low margin food products towards the more profitable personal care sector of soap, shampoo and the like.
Dividends have been on the rise for several decades at Unilever and shareholders now get a 2.64% yield that is covered 1.4 times by earnings. Higher shareholder returns in the future will, of course, rely on Unilever growing the top and bottom line.
There’s very good news on this front as its high exposure to emerging markets, which now account for more than half of sales, is leading to very good growth. Over the past six months alone sales grew 4.7% year-on-year, not a bad result for a company with over €50bn of revenue annually. Solid growth, steady dividends and a management team intent on boosting margins leaves me optimistic that Unilever will continue to be a solid company for a long time to come.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.