Ever since Warren Buffett made his conversion to owning great businesses, he has stressed that his favorite holding period is forever. Great businesses re-invest growth within their moats, thereby compounding shareholder value at a high rate for a long time.
It hardly matters what price you pay for a truly exceptional business in 2013; it will have created so much value by 2043 that your purchase price will not have a significant effect on your return. Therefore, investors who want to invest their savings without being a slave to the vicissitudes of the market will want to focus on buying great businesses.
Three businesses to own forever
It is no mistake that all three companies mentioned in this article own strong consumer brands. American consumers show exceptional loyalty to their favorite brands, which gives these companies significant pricing power that is unlikely to dwindle as the years pass by.
Colgate-Palmolive Company (NYSE:CL) is the world leader in oral care. Nearly one in two oral-care products sold around the globe is Colgate-branded. Colgate’s closest competitor, Crest, is less than one-third the size.
Colgate-Palmolive Company (NYSE:CL) earns high margins and has exceptional customer loyalty, affording it pricing power and protection from intruding private-label products. This has allowed the company to generate a return on capital that approached 30% over the last five years.
In addition, Colgate-Palmolive Company (NYSE:CL) is an exceptional steward of shareholder capital. Upper management has shown a commitment to investing within its moat in oral care, refusing to diversify into areas in which the company does not have a competitive advantage. Nearly half of the company’s revenue comes from its impenetrable oral-care segment, while the other half comes from strong household-product brands like Ajax, Palmolive, and Speed Stick.
Management’s devotion to markets in which the company has an unassailable advantage positions the company for long-term success. Despite being a mature free-cash-flow producer, Colgate-Palmolive Company (NYSE:CL) has experienced organic growth in the high single digits over the last decade — far outpacing inflation over the same period. If the company can keep this up, long-term shareholders will be richly rewarded.
PepsiCo, Inc. (NYSE:PEP) is another company with significant pricing power derived from brand loyalty. Although its carbonated soft-drink business is exceptional, trailing only Coca-Cola in worldwide market share, its snacks division is the key to PepsiCo, Inc. (NYSE:PEP)’s long-term value creation. The company has a 40% share of the global salty-snacks market, with brands like Lay’s, Doritos, Cheetos, and Frito’s leading the way.
PepsiCo, Inc. (NYSE:PEP)’s extensive distribution system enables the firm to serve its customers with both carbonated soft drinks and snacks at the same time. This enables the company to use its distribution system even more efficiently than Coca-Cola. No other company (besides Coca-Cola) could possibly replicate PepsiCo, Inc. (NYSE:PEP)’s distribution system economically, which gives the company ample protection from competition.
Just as Colgate-Palmolive Company (NYSE:CL) exploits its lead in oral care to earn high returns on capital, PepsiCo, Inc. (NYSE:PEP) leverages its scale and brand equity to generate out-sized profits and decent growth; the company earns close to a 15% return on invested capital and is growing faster than the U.S. economy — close to 5% organic growth each year. The company’s stable earnings, entrenched market position, and decent growth profile make it a good buy-and-hold-forever candidate.