Just a handful of firms in the FTSE 100 have defensive, growing businesses that tend to show resilience as the effects of macroeconomic cycles put pressure on others. I’m happy to invest in those firms until the day I retire and beyond, with a reasonable expectation that my total return will be positive.
If you’re looking for buy-and-forget investments that can help you grow your funds while you get on with your life, it’s worth considering these few well-positioned companies. Today, I’m looking at two of them: AstraZeneca (LSE: AZN) and Imperial Brands (LSE: IMB).
Cash, cash, cash
Cash is almost everything when it comes to spotting a great business. To be specific, if a business isn’t generating steady flows of incoming cash it doesn’t qualify as a great business, in my view. Businesses exist to make money and we need to see that in cold, hard cash, not just in an accountant’s figure for profits written on a profit and loss statement.
If a firm’s financial record shows a lumpy pattern of net cash generated from operations, there’s a good chance the business suffers from the effects of trading cycles. That’s not good for a long-term buy-and-hold investment. AstraZeneca and Imperial Brands aren’t like that. They both have a good record of generating reliable net cash from operations tending to come in around the level of profits, so earnings have support from real cash flows.
Cash pays dividends and regular, growing dividends will make a big contribution to the total returns for investors in the years to come from these two firms.
AstraZeneca and Imperial Brands are able to generate steady flows of cash from their businesses regardless of macroeconomic conditions. I think that’s because they both deal in ‘essential’ consumer goods with short life spans. Customers rarely forego AstraZeneca’s medical treatments or Imperial Brand’s tobacco products no matter how hard times become. They keep buying over and over again, and that behaviour makes cash flow and dividend payments predictable and reliable. That’s why investor’s label such firms as ‘defensive’.
Contrast these defensive stalwarts with more cyclical firms such as builders, banks and retailers and it’s easy to appreciate their enduring appeal. Companies with a high level of cyclicality in their operations deal in goods and services that last longer, tend to cost more, and that are easily avoided when consumers hit hard times. Cash generation from the cyclical firms can be volatile, which leads to unreliable dividends and fluctuating share prices. You don’t want to be holding cyclical firms like that until you retire, without looking, because the investment outcome will be uncertain and unpredictable.
Dividends — one of life’s great pleasures
Imperial Brands has a strong record of rising dividends, and AstraZeneca has held its dividend steady in recent years as the firm works through a period of difficulty due to expiring patents. The company is rebuilding its product base though, and I think investors will see increases in the dividend down the line.
At today’s share price of 4,579p, AstraZeneca’s forward dividend yield runs at 4.8% for 2017. At 3,941p, Imperial Brands yields 4.3% for 2017. To me, both firms look like promising candidates to hold until you retire and beyond.