The one stock you can buy and hold forever

Here’s one company that Rupert Hargreaves believes has what it takes to survive for the long term.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Long-term buy-and-hold investing is the best way for most stock market investors to build wealth. However, it’s becoming increasingly difficult to find companies that will even survive the long term, let alone generate steady returns for investors.

Indeed, a study conducted by Professor Richard Foster of Yale University during 2015 showed that the average lifespan of a company in the global S&P 500 index has fallen from 61 years in 1959 to just 18 years. This implies that by 2027 more than three-quarters of the companies listed in the S&P 500 will be those that we’ve not yet heard of. Even more shocking is the statistic that the average lifespan of an ad tech company is just six years.

Many factors are contributing to shorter company life expectancies including technology changes, disruption, regulatory changes and general attrition. All of these factors are making life harder for the long-term buy-and-hold investor. 

Nonetheless, there are still some companies that have all hallmarks of a long-term winner and drinks giant Diageo (LSE: DGE) is one such.

It’s all in the brand 

When Warren Buffett first bought Coca-Cola in the late 1980s, he recognised the company had a great brand with a worldwide following, and this was worth more to the business than anything else.

Diageo owns not just one great brand, but many great brands in the drinks industry and these brands come with a heritage that’s impossible for any competitor to replicate. Brands such as Guinness and Johnnie Walker whisky have been around for centuries and have appealed to many different generations, which means customers are fiercely loyal to these brands.

As a result, Diageo is almost immune to competition and disruption. Granted, the company’s sales growth has slowed in recent years as competition in the drinks sector increases and the group deals with slowing demand for its spirits within China, but Diageo now seems to be back on track. The first half of 2016 saw net sales growth of 2.8% and operating profit growth of 1.6%.

Cash cow 

Diageo’s product portfolio isn’t its only strength. The business also has fat profit margins and generates billions of pounds in free cash flow every year. 

For 2016 the group generated free cash flow of £2.1bn on an operating margin of 27.1%. With such a healthy inflow of cash for the year the company was able to pay down £1bn worth of debt and return £1.5bn to shareholders. 

Aside from Diageo’s brand portfolio, the company’s operating margins and free cash flow, one of the most impressive metrics about the business is its return on average invested capital (ROIC). This measures how much profit a business can generate for every pound invested. According to consultancy McKinsey, the average ROIC for blue chips for the past five decades is in the region of 10%. Diageo’s ROIC last year was 12.1%, which clearly shows how strong the company’s business model is.

All in all then, Diageo’s world-class brand portfolio, impressive free cash flow and above-average returns on capital show that the company is one business you can rely on to be around for a long while yet. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »