Charlie Munger once estimated the number of S&P 500 companies that would be in a better position five years in the future was below 2%. But I think some UK shares have a decent chance.
A business with a long-term competitive advantage in an important industry can make for a great investment. That’s why I’m planning to hold the ones I own indefinitely.
Diageo
FTSE 100 drinks company Diageo (LSE:DGE) is one example. The firm has a strong portfolio of brands that includes leading products in several spirits categories.
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This can be a challenging business to be in. Regulation is a risk, with a constant threat of governments looking to curb alcohol consumption either by taxes or prohibitions.
That’s a potential issue with the size of the market in future. But the company’s real strength comes from its dominant position within the spirits industry, which looks very hard to disrupt.
Scotch, for example, is a category where supply is limited by a couple of factors. One is the fact a whisky has to be distilled in Scotland and another is the fact it takes literally years to produce.
In my view, though, Diageo’s key strength isn’t its brand portfolio. It’s the scale of its operations, which allows it to acquire upcoming competitors before they develop into significant rivals.
Joining Diageo’s vast distribution network can add significant value for a promising small operation. So there’s scope for the company to earn a return as well as protecting its position.
Primary Health Properties
An ageing population in the UK is likely to mean increased demand for health services. And this isn’t a trend that I expect to reverse any time soon.
I think this is a good sign for FTSE 250 real estate investment trust (REIT) Primary Health Properties (LSE:PHP). The business owns and leases a portfolio of GP surgeries.
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I think this is a durable business, but things aren’t entirely straightforward. If the firm plans on growing, it will need to finance this somehow. One option is debt, but that can be risky.
According to its latest report, the loan-to-value of the firm’s portfolio is 48%. That’s high and presents a potential risk when the time comes to refinance its debts.
Having 89% of its rental income paid by the government, however, reduces the risk of tenants defaulting. And this means the business should be able to manage with higher leverage.
Right now, the stock comes with a 6% dividend. At today’s prices, I think the stock is attractive and I’m planning on collecting the income indefinitely.
To buy and to hold
Both Diageo and Primary Health Properties have strong records of growing their dividends over time. And this is no accident – it’s the result of businesses with durable long-term prospects.
In either case, the share price could theoretically reach a level that would convince me to sell. But I’m not expecting this to happen and I’m happy keeping my shares permanently.
