When it comes to investing for the long term, few people can boast the experience and success of octogenarian multi-billionaire Warren Buffett. One of his pearls of wisdom is: “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1.”
Now, Buffett isn’t referring to short-term movements of share prices but to permanent or near-permanent losses for investors due to a poor business or poorly managed business. However, if we invest in top-quality businesses at a fair price, we should enjoy the rewards long into the future. Buffett’s investment in The Coca-Cola Co is a classic example. Looking to the FTSE 100, I would put Unilever (LSE: ULVR) in the same category.
Excellent value
As a global giant with a stable of trusted food and household brands, Unilever boasts excellent profit margins, prodigious cash generation and a superb long-term record of shareholder returns. Over the past 10 years, it has delivered an annualised total return of 10.9%, compared with 5.8% for the FTSE 100. I see no reason why the company cannot continue to deliver for investors for decades to come.
Warren Buffett-backed Kraft Heinz made a 4,000p-a-share bid for Unilever just over a year ago. As I’m writing, Unilever’s shares are trading at under 4,000p. This is not only below the level Buffett was prepared to pay, but also about 12% below last year’s high. I believe now could be a great time to buy a slice of the business.
When I wrote about the company earlier this year, the share price was at a similar level as today and the valuation was 19 times forecast 2018 earnings with a prospective 3.4% dividend yield. I consider Unilever’s shares to be excellent value when the forward earnings multiple is below 20 and the yield is above 3% and that remains the case today.
One-stop shop
While I see Unilever as an excellent pick for investors looking to build a small portfolio of high-quality businesses to buy and hold forever, I would choose Foreign & Colonial Investment Trust (LSE: FRCL) if I were looking for a one-stop shop. It tags itself “The original investment trust”. Indeed, it’s the oldest collective investment fund and has paid a dividend every year since its inception 150 years ago.
Foreign & Colonial doesn’t try to do anything too clever or risky but gives investors broad exposure to long-term global growth. Its £3.7bn assets are invested in over 500 stocks in 35 countries. Its largest holding, Amazon, has a weighting of just 1.8% of the portfolio, so individual stock risk is low. Other familiar names in the trust’s top 20 holdings include Microsoft, BP and Pfizer, but it also has some exposure to emerging markets stocks and private equity.
Over the past 10 years, Foreign & Colonial has delivered an annualised total return of 10.5%, or 9.4% on a net asset value (NAV) basis. The shares currently trade at a small discount to NAV, which I’d be happy to buy at, while a running dividend yield of 1.6% could grow into a substantial income stream over the long term.
