Wouldn’t it be nice if we could pick firms to invest in and then hold them for years until we retire, and into retirement, without having to worry about our shares?
That strikes me as an elegant strategy, if we can pull it off. No worrying about macroeconomic convulsions, no frantic trading or caffeine-fuelled, eye-straining long hours glued to the computer, watching every twist and turn our investments make.
Instead, we just sit back, relax, enjoy life, and reinvest dividends back into our holdings, as our invested funds gently compound and our retirement pots grow.
Some firms have special businesses
I think it can be done, and the strategy is most likely to generate a fund big enough to enjoy a happy retirement on if we target firms that fall under the general label of ‘Growing Defensives’.
To me, defensive firms are those that are least affected by fluctuations in the economy. They deal in ‘essential’ goods and services that don’t last very long and which people buy repeatedly, even in the depths of recessions. Such firms can generate stable and predictable inflows of cash because of their defensive businesses and that leads to reliable dividends.
Now layer on top of these defensive attractions an ability to expand the underlying business, grow earnings year after year, and raise the dividend progressively, and we have a very attractive proposition that could lead to rising income and capital gains for investors.
In my hunt for special firms like that, today I’m looking to see if FTSE 100 companies National Grid (LSE: NG) and Hikma Pharmaceuticals (LSE: HIK) measure up.
Powering ahead
As Britain’s provider of long distance gas and electricity transmission systems, National Grid occupies a monopoly position, which means it can be likened to an operator of a toll bridge — if we want to cross the bridge, we must pay the toll. In a similar way, if we want to use electricity and gas we must pay National Grid (albeit indirectly, via utility companies).
On top of that privileged position, the firm deals in an essential product. Customers don’t turn the heating and lights out every time the economy tanks. Power is often the very last thing to face the chop from domestic budgets.
National Grid’s business, which also includes operations in the US, has the defensive characteristics I’m looking for, so it’s no surprise to see the firm has a decent record of rising figures for cash generated from operations. The cash inflow supports profits well, and the directors have pushed the dividend up a little each year.
Medicating the world
Hikma Pharmaceuticals develops, manufactures and markets more than 550 branded and non-branded generic pharmaceutical products around the world. Medicines are essential for many and it’s not something that most people skip, even in hard times.
People use medicine up fast and then return to buy it again, and that drives steady cash into Hikma’s business. Just like National Grid, Hikma’s defensive characteristics show up in the record of cash generation and rising dividends.
Both firms make the cut as growing defensives and they are well worth researching further with a view to buying and holding the shares for the long term.
