3 FTSE 100 stocks with magnificent moats

Find a company with a wide economic moat and you’ve probably found a very safe investment.

| 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.

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.

Legendary investor, Warren Buffett recommends that investors try to find companies with moats — those features that allow a business to remain competitive, thereby protecting its profits and market share.

Perhaps the most obvious type of moat relates to size. The bigger a company is, the more it will be able to take advantage of economies of scale. It can produce more for less and set prices lower than rivals while still making a profit. Large companies are also less likely to run into trouble when economic conditions deteriorate.

Consider Royal Dutch Shell (LSE: RDSB). With a market cap of £178bn, the oil major is by far the biggest business listed on the London Stock Exchange. While its fortunes will always depend on factors  it can’t control (like the price of oil), the sheer size of the business allows Shell to absorb the kind of shocks that would cripple many smaller companies. Even when Brent Crude plummeted to $28 last January, the company was able to cuts costs where necessary and preserve its much-prized dividend.

Brands are another form of moat. One example of a company having an enviable portfolio of ‘sticky’ labels would be £49bn cap consumer goods giant, Reckitt Benckiser (LSE: RB). Many shoppers wouldn’t dream of moving away from products such as Dettol, Cillit Bang and Air Wick, despite being aware that the differences between these and cheaper alternatives are fairly negligible. This gives earnings a degree of predictability, which also means that shares in the Slough-based business consistently trade on a price-to-earnings (P/E) ratio of at least 20. 

British American Tobacco (LSE: BATS) — in addition to owning some of the industry’s best known brands — also benefits from a different kind of moat in the form of new legislation. The growing opposition to smoking now makes it highly unlikely that new companies will attempt to enter the market, thereby allowing British American to retain and build on its dominant position.

A declining industry? Perhaps, but one that could still generate significant returns for shareholders over the medium term. On a P/E of 20, the world’s biggest tobacco company (having recently agreed to buy its biggest rival Reynolds for £40bn) still warrants a closer look.

Don’t get too comfortable

While all of the above present as relatively safe investments, the fact that a company has a perceived advantage shouldn’t be taken for granted. In contrast to those protecting Shell, Reckitt Benckiser and British American Tobacco, some moats can be narrow and/or short term.

Apple is one of the most valuable companies in the world. Given the relentless progress of technology however, it must continue to innovate to avoid becoming the next Blackberry. ASOS may be a favourite online destination for millions of young people but, thanks to the fickle nature of fashion, this may not always be the case; even more so if talented members of its board (another moat) decide to leave. And as the process for switching accounts becomes easier and quicker, banks and utilities can no longer rely on having the same customers for life as they once did. 

All this makes at least a degree of diversification vital when investing, even if your portfolio appears chock full of companies with economic moats. While this may reduce your returns over time, it’ll also allow you to sleep at night.

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.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser and Royal Dutch Shell B. 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

Young black colleagues high-fiving each other at work
Investing Articles

2 FTSE 100 value stocks I’d buy for my Stocks and Shares ISA in March!

Now could be a great time for fans of FTSE 100 value stocks to go investing. Here are a couple…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Looking for value stocks? Here’s 1 I’d buy and 1 I’d avoid!

This Fool delves deeper into two value stocks she’s had her eye on and explains why she’s bullish on one,…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

With the Airtel Africa share price in pennies, is it a bargain?

With the Airtel Africa share price having slumped by a quarter in just one month, this shareholder considers some of…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Are these 2 defensive FTSE 100 stocks shrewd buys after recent updates?

This Fool takes a closer look at these FTSE 100 stocks. She admires their defensive traits -- but does that…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The FTSE 100 closes up after full-year results from leading UK firms – are they buys?

Earnings season brings about a lot of ups and downs for the FTSE 100. Yesterday had some particularly good releases,…

Read more »

artificial intelligence investing algorithms
Investing Articles

Should I buy NVIDIA stock as a British investor?

NVIDIA stock is up two-thirds this year alone. Our writer considers some pros and cons, specifically given that he is…

Read more »

Investing Articles

With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

Stephen Wright thinks one of the best dividend shares to buy right now might be a Warren Buffett stock that’s…

Read more »

Investing Articles

How many Aviva shares do I need to collect a £100 monthly income?

Aviva shares are well suited for passive income purposes. Our writer works out how many would be needed for a…

Read more »