We all know that Warren Buffett’s favourite holding position is forever. The following two stocks form a core part of my investment thesis. With proven staying power, I view them as irreplaceable and I hope I would never feel the urge to sell them.
Energy Transition
National Grid (LSE: NG.) is one of the world’s largest investor-owned energy utilities. It owns and operates the high-voltage electricity transmission network across the UK. It also runs extensive gas and electricity operations in the US.
The energy sector is in the midst of the largest transformation in its history. National Grid is at the forefront of this revolution and is committed to invest £24bn into the decarbonisation of energy systems over the next five years.
At the heart of this revolution is the increasing importance of renewables, including wind and solar, in the energy generation mix. This is resulting in a seismic shift in the industry.
A system originally designed and built for one-way energy flows from central generating facilities to end-use customers is now beginning to see multi-directional flow patterns. New business models are already beginning to emerge to capture the exciting innovations in this space.
As more renewables come online, electricity interconnections are growing in importance. Interconnectors connect the electricity systems between neigbouring countries. This is but one example of how joint ventures in enabling the company to grow its revenue streams.
Energy security has moved right up the political agenda in 2022. National Grid has already warned of the potential for blackouts this winter. In late 2021, a serious fire at one of its stations affected supply.
The asset-intensive nature of its business is one reason why the company carries a large debt on its balance sheet. However, despite the risks, its monopoly status should provide predictable sources of revenue well into the future.
Ageing Demographics
One of the largest macro trends to emerge over the last decade is an ageing world population. This trend is likely to provide insurance giant Legal and General (LSE: LGEN) with tremendous growth opportunities in the decades ahead.
As people live longer, their pensions will need to last longer too. It’s estimated that the global pensions market is worth an eye-watering $57trn. Its near-200-year history provides L&G with a competitive advantage in capturing a portion of such future revenues.
One market that’s seeing explosive growth is pension risk transfer (PRT). Companies are increasingly turning to L&G to manage their defined benefit (DB) pension plans.
The UK is the most mature PRT market globally with £2.4trn of UK DB pension liabilities. However, at present, insurance companies only manage 13% of such liabilities. This provides a sizeable opportunity for future market growth.
L&G has consistently demonstrated its ability to grow its capital and cash generation. Since 2011, both earnings per share (EPS) and dividend per share have grown at CAGR of 11%.
A clear risk for the business is that rising inflation and interest rates can result in fluctuations in the value of its underlying assets. Nevertheless, it’s confident that it can consistently grow cash and capital faster than its dividend commitment.
Given all of this, it’s little wonder I can’t see myself ever selling out. In fact, given its recent share price weakness, I’m thinking of buying more.
