Suppose you were offered some cash to invest in just two stocks, with the condition that you had to keep them for 20 years no matter what happened. What would you choose?
That’s a tough one. Even Warren Buffett, renowned for his recommendation that if you wouldn’t own a company for ten years you shouldn’t own it for a minute, allows for selling if things start to turn sour. But I’ll have a go.
Insurance safety
I’ve always liked the insurance sector and have invested in it on and off for years. For a 20-year, no-sell pick I’d be tempted by Prudential purely for its safety — it’s the most conservatively managed insurance firm I can think of.
But I see the whole sector as far safer now that it’s been chastened by the financial crisis, and I think I’d actually go for Legal & General Group (LSE: LGEN).
Legal & General is nicely diversified as an insurer, being in the life business but also with plenty of exposure to the long-term savings and investment management segment, both of which help offset any risks from its general insurance activities.
The firm is a very solid dividend payer too, with forecast yields reaching more than 6% by 2019 — and we’ve seen steady progressive rises over the past five years in line with growth in earnings per share.
With a 20-year horizon, short-term valuation really doesn’t matter a great deal. But in plumping for Legal & General, I wouldn’t even be having to swallow a highly valued share price.
No, we’re looking at a forward P/E of only around 10.5, dropping to 9.6 on 2016 forecasts, which I think is cheap now. The only valuation downside is that the shares trade for around 2.3 times net asset value, but with the firm’s diversification across insurance segments, I’m not too worried.
Popping pills
For my next choice I considered utilities companies, but who knows what could happen to regulated industries over the next 20 years, especially if Jeremy Corbyn should gain power and try to nationalise the sector.
Instead I’m going to go for what might seem like a surprise choice in GlaxoSmithKline (LSE: GSK). Now, I know it’s been erratic, it’s at the mercy of the copycats when drug patents expire, and it needs a constantly renewed development pipeline simply to stand still. And it’s always at risk of upstarts with new technology turning the old pills and potions approach into history.
But over the next 20 years we’re going to see a vastly bigger proportion of the world’s population finding themselves in improved economic conditions and demanding more and more healthcare.
And there are so many medical conditions still around for which we only have barely adequate treatments at best that there’s always going to be a need for the high-powered research that only the world’s top pharmaceuticals companies can afford.
New technologies and uppity startups? They’ll still need big funding, and the likes of Glaxo are ideally place to partner them or simply buy them out.
Finally, as it happens, I also think Glaxo is on a pretty reasonable valuation even now, on forward P/E multiples of a bit over 13, and with expected dividend yields of 5.6%.
My colleague Harvey Jones recent tipped GlaxoSmithKline as his buy of the decade. Make that two.
