Building a SIPP over the course of decades helps to concentrate my mind on the characteristics of shares I think could do well far into the future. As a long-term investor, that suits me well.
Large end markets
I like companies that have large markets of target customers that also look set to remain big.
With several billion customers a day using its products, that applies to Unilever. Its range of everyday products from soap to moisturiser means that its addressable market ought to remain huge for decades.
The same applies to Diageo, although a decline in alcohol consumption among younger generations could eat into its market size. However, Diageo has been expanding its non-alcoholic portfolio.
Unique competitive advantages
If you feel like a Guinness, what else will do? As a lover of Marmite, is there any substitute?
Those are just some of the premium brands both companies have built over many years. Owning unique brands with loyal customers gives a company a competitive advantage.
In commercial terms, that gives a business pricing power. They can charge a price premium because loyal customers see no direct substitute for a brand they like.
Pricing power allows a company to avoid getting sucked into a race to the bottom on prices, helping maintain profit margins.
Last year, Diageo made £3.8bn of post-tax profits on revenues of £23.5bn. At Unilever, the figures were €8.3bn and €60.1bn.
Not only are those large profits, they also represent sizeable profit margins. That shows why pricing power can help companies do well financially.
If I owned shares in those companies, some of that financial benefit could come into my SIPP in the form of dividends. Both businesses spend a lot of money each year paying dividends.
Indeed, Diageo has raised its payout annually for over three decades. Past performance is not necessarily a guide to what will happen in future. But I do expect pricing power to help both businesses perform well in future.
Eyeing these shares
Both companies face risks, of course. Some are similar, like inflation pushing up the cost of ingredients. Others are company-specific. Unilever has to contend with a growing field of small-scale producers that could eat into its sales. Diageo can suffer from sudden drops in demand, as when South Africa banned alcohol sales during the pandemic.
At the right price, though, I would be happy to buy both shares and hold them in my SIPP for the long term.
Why have I not bought them?
The Diageo share price valuation is still higher than I would like, with its price-to-earnings ratio of 19. Meanwhile, Unilever looks a bit cheaper and, if I had spare money to invest now, I would happily add it to my SIPP.