Businesses that have proved their worth for decades deserve a place in your portfolio.
Mediocre companies don't exist for long so companies that have lived to a ripe old age are clearly doing something right. They've gained a competitive edge that demands respect and is worth studying.
The three shares below all have three things in common, which could make them sound buys for the long term:
- consistent operating history;
- very profitable; and
- favourable long-term prospects.
The only issue is whether they can be purchased at a significant discount to their value.
Tesco
Tesco (LSE: TSCO) can be said to have begun life in 1919 when Jack Cohen began a small grocery stall in the East End, officially founding Tesco Stores Ltd in 1932. Since then it has grown to become the UK's largest retailer, going public in 1947.
It's hugely profitable: for the 53 weeks ending 28 February 2009 its turnover was £54.3bn and profits were £3.0bn.
Over the years, it has proved a great growth stock and, in my view, it's still a quality growth stock. It recently unveiled quarterly results showing sales up 12.6%, excluding petrol. This growth was driven in particular by its international business where sales increased by 20% at actual exchange rates.
At the end of February, its operations in Asia and Europe were trading from 1,911 stores, including 608 hypermarkets, with a total of 55m sq ft of selling space. This year, it plans to open over 300 new stores with a total sales area of around 6m sq ft.
Tesco already operates in China and last year entered the Indian market. In India it is establishing a cash and carry business and has signed an exclusive franchise agreement with Trent, the retail arm of the Tata Group. Trent currently operates four Star Bazaar hypermarkets, with plans to grow to 50 stores over the next five years. Tesco will supply these hypermarkets with products and offer its retail expertise and technical capability to support the development of their business.
As a brand it is synonymous with value, low cost, mass market products and as the success of its foray into telecoms shows it can leverage this.
After acquiring the remaining 50% of Tesco Personal Finance from Royal Bank of Scotland (LSE: RBS), Tesco can further develop its financial services and move towards the objective of becoming a full-service retail bank.
Trading on a prospective P/E ratio of just 12.2 times, Tesco looks good value.
Cadbury
Cadbury (LSE: CBRY) has been around for almost 200 years. It was founded by John Cadbury, a young Quaker, who first set things in motion when he opened a shop in Birmingham in 1824.
It seems that come recession, boom, war and peace, consumers love Cadbury's chocolate, helping it make consistent profits. As a business, it is easy to understand, is a good defensive stock and is highly cash generative.
It is now a pure play confectionery company, demerging Dr Pepper Snaffle Group in 2008 and selling Schweppes Australia earlier this year for £475m net, which was used to pay down debt.
The net debt figure at the previous year end was £1.9bn and the interim results due out at the end of this month should provide an updated figure.
On 18 June, Cadbury provided a trading update in which it said that it had built on a good first quarter with improved trading in April and May. For the full year it expects revenue growth around the lower end of a 4%-6% range. It should make good progress toward its goal of mid-teens margins by 2011.
The shares are trading at 528p and offer a prospective dividend yield of 3.3%.
Diageo
Diageo (LSE: DGE) was formed in 1997 with the merger of Guinness and Grand Metropolitan and is now the world's largest producer of spirits, wines and beers. However, its roots extend as far back as 1759 when Arthur Guinness signed a 9,000-year lease on a disused brewery at St James's Gate in Dublin, deciding soon after to brew a variation of the porter stout popular in London at the time.
As a business it is highly cash generative and easy to understand. For the year to 30 June 2008 it made revenues of £10.6bn and pre-tax profits of around £2bn. In its latest update, Diageo confirmed that despite a challenging trading environment it was forecasting organic operating profit growth for the year in the range of 4%-6%.
The shares are trading at 901p and offer a prospective dividend yield of 4%.
More share ideas from Chris Menon:
