With Berkshire Hathaway Inc. (NYSE:BRK.B)’s annual shareholder meeting almost upon us, I am reminded of this investing gem Warren Buffett once said: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.” That bit of advice is beautiful in its simplicity. Buffett is challenging us to think long-term with every investment decision. That is a challenge we should all accept; constructing ten year portfolios that would make the Oracle of Omaha proud.
Ten Years of Alcohol
Buffett famously loves companies that have dug a wide moat around their business; a large, defensible, long-term competitive advantage that keeps smaller companies outside the castle gates. And in the world of liquor, no company has a wider moat than the UK-based Diageo plc (ADR) (NYSE:DEO). Diageo has all of the characteristics of a great moat company; incredibly popular brands (Smirnoff, Johnnie Walker, Guinness, Captain Morgan), worldwide distribution, partnerships and investments with other alcoholic-beverage companies, shelf-space dominance and the ability to raise prices with little-to-no customer blow-back.
Diageo plc (ADR) (NYSE:DEO) currently trades at a price to earnings multiple of 26. Contrasting that to its 10-year average PE of about 15, shares of Diageo today might seem a little pricy for a value investor. But with the company’s long-term growth prospects in China, India and the beginning states of growth in Africa, the Diageo of ten years from now could be well worth a buy at today’s prices. As Buffett once said, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful piece.” And Diageo plc (ADR) (NYSE:DEO) is certainly a wonderful company.
Ten Years of Yogurt
Groupe Danone is another wide-moat company, as the worldwide leader in yogurt with about 23% of the global market share. In the United States Danone (known as Dannon state-side) recently became the US market share leader; one of the few countries Danone was not already number one. Surpassing the Yoplait brand of General Mills, Danone now has 27.8% market share, while General Mills has 25.8% market share. Just two years ago, the US market share was 31.6%/26.7% in Yoplait’s favor. One contributor to Danone’s US market share gains was Dannon Oikos, the company’s Greek yogurt offering, which had the most sales of any new US food and beverage product launch in 2012.
Dragged down these past few years by European weakness, the strength of the Danone’s North American and emerging market operations are finally starting to get notice. Shares of Danone have been on a bit of a run these past 6-months, rising about 23% (with the benchmark French CAC 40 index up only 11%). Despite the run, Danone can still be considered a value stock trading at 21.2 times 2013 earnings estimates, but just 16.8 times 2014 estimates (compared to its 10-year forward price to earnings average of about 18.7, and as high as 24x in 2007).
Ten Years of Financial Transactions
If eBay Inc (NASDAQ:EBAY) were to ever spin-off its fast-growing PayPal division, it would be a definite candidate for the 10-year portfolio. As a standalone company, PayPal would be a pure-play financial transactions company, a la Visa (a Berkshire holding). PayPal by itself, with his growth prospects, is almost worth of the entire share price of eBay today (essentially getting the great eBay Inc (NASDAQ:EBAY) marketplace and the GSI Commerce division for nothing). In 2012, PayPal processed about 15% of the over one-trillion dollars in electronic commerce transactions. That should increase even further as PayPal continues to expand into emerging markets, as well as domestically with its partnership with Discover Financial Services (NYSE:DFS) to provide offline PayPal transactions later this year to millions of brick and mortar retail locations in the United States.
eBay, however, is the only company on this 10-year portfolio list that does not pay a dividend. A dividend is something that a long-term investor like Buffett would usually look for, as most of the stocks in Berkshire Hathaway Inc. (NYSE:BRK.B)’s portfolio pay out a regular dividend. As long as eBay Inc (NASDAQ:EBAY) is continuing to invest money into growing their PayPal division though, the lack of a dividend payment can be excused for now and for the foreseeable future. At this stage in PayPal’s life, growth should definitely be prioritized over returning cash to shareholders.