3 quality stocks I’d buy and hold for decades

G A Chester highlights two FTSE 100 (INDEXFTSE:UKX) stocks and one smaller company that could offer impressive returns for long-term investors.

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Buying shares in high-quality businesses and holding them for the long term is a sound strategy, in my view. Moreover, it’s a view shared by legendary investor Warren Buffett. Today, I’m looking at three stocks I believe fit the bill. Drinks group Diageo (LSE: DGE) and publisher Relx (LSE: REL) are both FTSE 100 giants. Pubs firm Fuller, Smith & Turner (LSE: FSTA) is a smaller company, but one I consider to have blue-chip credentials.

Great opportunity

On the surface, the headline numbers in today’s half-year results from Fullers weren’t impressive. Revenue increased 6%, but adjusted pre-tax profit and earnings per share were both down 1%. The National Living Wage and business rates had an adverse impact (a sector-wide issue) but it also took a conscious decision to front-load its investment programme to ensure its estate is in “the best possible position to benefit from the busy Christmas period and beyond.”

This is typical of how it always looks to the longer term, just as it continued to invest during the last recession and later reaped the rewards. The company has faced far greater challenges than Brexit in its 173-year history and I believe the current depressed share price of 912p represents a great opportunity to buy a stake in the business. The forward 12-month price-to-earnings (P/E) ratio of 13.8 is cheap by historical standards, while the dividend, which has been increased every year since the 1950s, yields 2.3%.

Quality global enterprises

While Fullers is a brilliant UK-focused business, Relx and Diageo are top-quality global enterprises. Relx provides information and analytics to customers in attractive growth fields, including scientific, medical and legal. Diageo owns powerful consumer drinks brands, including Johnnie Walker whisky, Gordon’s gin and Guinness stout.

The fundamental quality of Relx’s and Diageo’s businesses are manifested in growing revenues, high profit margins and high returns on shareholders’ equity. I believe both companies are more than capable of continuing to deliver terrific results for investors in the decades to come.

Buy the dips

Having dipped below 1,500p during the October market sell-off, Relx’s shares are currently trading at 1,620p. Similarly, Diageo’s shares dropped to near 2,500p but are now up to 2,800p. Buying on the dips during market turbulence is a good strategy with high-quality businesses like these, and Relx was highlighted near its lows by my Foolish colleague Kevin Godbold. Has the opportunity now passed? Or, with both stocks still below previous highs, are their valuations still attractive?

Relx is on a forward 12-month P/E of 18, with a prospective dividend yield of 2.7%. When I last wrote about the company (last year), the share price was a little lower than today (but so were earnings forecasts) and the P/E was 19. Due to the quality of the business, I viewed the stock as very buyable on that rating. As the P/E is now 18, I maintain the same view today.

Diageo’s forward 12-month P/E is 21.7 and its prospective dividend yield is 2.5%. This is very similar to figures of 21.9 and 2.5% when I last wrote about the company (during the summer). I rated the stock a ‘hold’ at that time, but suggested a dip in the share price (then 2,750p) would be a good buying opportunity. The dip having come and gone, I’m back to rating this higher-premium stock a ‘hold’ for the time being.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and RELX. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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