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Finding stocks that are going to last a lifetime is almost impossible. Just take a look at the stocks in the Dow Jones Industrial Index over the years. Most of the founding companies in that group either don’t exist anymore, or have gone through several iterations to become entities that barely resemble their former selves. Knowing this, you can see the dilemma with trying to invest in something that’s going to last forever.
When trying to invest in companies with time horizons that long, the most important thing to do is look at businesses that will be incredibly difficult to disrupt. With that in mind, three companies that stand out to me are trash-handling specialist Waste Management (NYSE:WM), everyone’s favorite conglomerate, Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), and railroad company Canadian National Railway (NYSE:CNI). Here’s a look at why these three have the traits you want in a company that will last forever.
An investment you don’t want to throw away
A lot can be said for investing in those compulsory things we do everyday and put little thought into. One place where this is on full display is trash. We throw things away, and for the most part, they are taken care of without us really noticing other than having to pick up our empty bins once a week. In many cases, the company doing that work is Waste Management, and what it does behind the scenes of that seemingly innocuous act of throwing something away is what makes the company a compelling investment.
It’s not easy running a major waste handling business. Trying to get all the necessary permits to open a new landfill can be extremely challenging, so those companies with existing landfills are already at an advantage. Another is the fact that owning and operating a fleet of collection vehicles is capital-intensive and has high operational costs. These things matter because it means the barriers to entry in this business are enormous, which gives Waste Management a major advantage when it comes to pricing power.
On top of the inherent benefits of the waste handling business, Waste Management stands out among its peers because of its focus on costs and generating returns for investors. Many might see the use of methane gas produced in its landfills to fuel its waste collection vehicles as a PR stunt. In reality, it helps to offset one of the business’s largest costs: Fuel. It’s innovative thinking like this that has led Waste Management to be the top dog in terms of returns on capital employed in the waste industry.
Waste and how we deal with it is going to be a difficult industry to disrupt. So, if you’re looking for an investment that will last a lifetime, you’ll be hard-pressed to find one better suited than Waste Management.
Berkshire beyond Buffett
Investors immediately associate Berkshire Hathaway with Warren Buffett, and rightly so. Buffett’s investing savvy is pretty much why Berkshire Hathaway is now a $412 billion conglomerate with fully owned subsidiaries that touch just about every industry out there. It also has an investment portfolio of publicly traded companies that’s probably one of the most carefully analyzed group of companies on the market.
So, for many investors, investing in Berkshire Hathaway is a vote of confidence in Buffett to make the correct capital allocation decisions. But what about when Buffett is no longer around to make those decisions? That likely has investors wondering about the next phase of Berkshire Hathaway’s life as a business. Based on the way Buffett has constructed this conglomerate, though, investors should have confidence in the company’s future.
One thing unique about Buffett’s management style is that he has a very hands-off approach when it comes to the day-to-day operations of the businesses underneath the Berkshire umbrella. That means the companies within Berkshire have the ability to stand on their own, and they will likely continue to generate strong returns — the very reason Buffett bought the companies in the first place. In fact, earnings for the underlying businesses owned by Berkshire Hathaway excluding investment income from its insurance float and direct investment gains — the two segments that involve the most capital allocation decisions from Buffett — generated more than 50% of the conglomerate’s earnings in 2015, and that’s expected to grow after the acquisition of manufacturer Precision Castparts.
Buffett has long espoused the idea of investing in great businesses that an idiot can run. With the suite of businesses under Berkshire Hathaway acting as a strong earnings engine, he has built the very kind of business he looked to buy. Berkshire should remain a company that can investors can hold for a long time after Warren Buffett has left the company.
A hard-to-disrupt business and a shareholder-friendly management team
When it comes to moving goods, just about every other mode of transportation has a long ways to go to catch up to railroads in terms of cost efficiency. The revenue per ton mile of goods moved — the best apples-to-apples metric we can use for comparing transportation methods — has railroads as the most cost-effective means for transporting goods, especially when it comes to heavier bulk commodities. So, as long as we need commodities like fertilizer, minerals, steel, and myriad other products, rail is going play a critical role in moving goods.
That is the foundation for an investment in railroads, but there are two reasons Canadian National Railway is a compelling investment among all of the other railroad companies — Berkshire Hathaway’s Burlington Northern Santa Fe included.
The first is that Canadian National Rail’s network is the only class 1 rail network that has terminals on the East, West, and U.S. Gulf Coasts of North America, making it a crucial artery for moving goods across the U.S. and Canada. It also helps that the geographic footprint of its rail network doesn’t have much exposure to coal. This is becoming a key differentiator as coal production declines, and with it, coal freight volumes.
On top of its geographic benefits, Canadian National has the best operating ratio — an industry metric similar to gross margin — among North American railroads. The lower the operating ratio, the more efficient the company is at converting revenue to profits.
|Canadian National Railway||58.1%|
|U.S. Based Rail companies (industry avg.)||67.1%|
With an advantage over competitors in terms of geographic footprint and a more efficient operation, Canadian National produces great returns and rewards investors with a robust share buyback program and a dividend. Its dividend yield that won’t wow anyone, but it has grown at a double-digit rate for years.
These are the kinds of traits you want in a buy-and-hold-forever kind of stock, so investors with a long-term investing time horizon should add Canadian National Rail to their lists.