If 2020 has taught us anything from an investment perspective, it’s that companies built to last are better able to withstand the unexpected negative surprises the world has in store for them. Hopefully we are closer to the end of the COVID-19 pandemic that caused the unrest last year than to the start of it. Still, history suggests there will be another market shock in the future, which makes it important to keep looking for companies built to last for your long-term investments.
Some key characteristics of a business built to last include a strong balance sheet, a gulf that protects its operations from competition, and lines of business that meet the key needs of its customers. With that in mind, these three stocks seem designed to last and therefore might be worth buying for the next 10 years.
North America’s Largest Energy Infrastructure Company
Even with the rapid rise of renewables, the US Energy Information Administration predicts that demand for oil and natural gas will remain strong for decades to come. All this energy has to be transported from where it is produced to where it is consumed, making Enbridge (NYSE: ENB) worthy of consideration. North America’s largest energy infrastructure company, Enbridge is a leader in transporting energy across the continent.
As long as demand for energy remains strong, it will be necessary to transport it, and pipelines like the ones Enbridge operates tend to be among the cheapest ways to do this. In addition to the advantage of low cost, new pipeline capacity tends to be politically difficult to build, which makes existing much more valuable infrastructure.
From a balance sheet perspective, Enbridge has a debt to equity ratio of around 1.0, which is roughly equivalent to the corporate equivalent of owning a house worth $ 200,000 with a mortgage of 100,000. $. When combined with cash flows that are more dependent on amount of energy that circulates in its pipes that the the price of this energy, it is a reasonable debt for a company with a strong future potential.
A foolproof insurance titan
Prudential Financial (NYSE: PRU) is so focused on self-confidence that it’s built to last that it uses an actual rock formation – the Rock of Gibraltar – as a corporate symbol. This use is an attempt to show how “rock solid” its balance sheet is in order to attract customers. Fortunately for potential investors, it relies on cold, solid cash and bonds. At the end of December 2020, it had around $ 13.7 billion in cash and well over $ 400 billion in bonds to support its insurance operations.
On top of that, with over $ 68 billion in net equity on this balance sheet, a lot can go wrong beyond what the company expects, and it can always end well. Insurance is about assessing risk – figuring out what can go wrong and what it will cost to fix it. While insurance companies are good enough at this, they are not perfect. A strong balance sheet is what gives them flexibility for when they get it wrong.
From an investor’s perspective, Prudential Financial is trading at around half of its book value, which gives good reason to believe its stocks are not overvalued. Prudential also offers its shareholders a return of around 5.7%, on a dividend that it recently increased. This dividend provides good income to investors, and the increase indicates that Prudential Financial expects to generate enough cash to cover this payment. This bodes well for its outlook over time.
Business on the verge of success at the end of “free money”
The Federal Reserve’s balance sheet exploded as it bought back corporate bonds during the COVID-19 pandemic. This has led to some of the lowest interest rates ever for businesses and even in some cases consumers, fueled by this buyer with very deep pockets. The problem with all this cheap money is that it tends to drive inflation. In addition, when money flows freely, it also increases the chances loans are made that probably would not have been made under more stringent monetary conditions.
When loan conditions tighten, subprime loans often start to deteriorate. This can happen either because the borrower has had problems and cannot make the payments, or because the lender has stopped wanting to extend new credit, forcing old loans to default on their due dates. However, when loans go badly, PRA Group (NASDAQ: PRAA) step in to start collecting those debts.
Although PRA Group has a debt ratio of around 2.1, the largest debts on its balance sheet appear to be credit facilities that it has extended without much problem in recent years. Suitable for a business in the debt buying industry, its receivables (the amount owed to it) are actually greater than its total indebtedness. This gives good reason to believe that his own lenders will be willing to continue to extend credit or that he may find other lenders who would in a pinch.
From an investor’s perspective, PRA Group is trading at around 11.5 times its profit forecast. and these profits are expected to grow steadily over the next five years or so. With this combination, potential investors are well positioned to see decent returns if the future plays at a level close to these projections. Add that to a company that could do well if lending tightens, and the PRA Group looks worthy of consideration for a place in a long-term-focused portfolio.
Companies to consider for the long term
While PRA Group, Prudential Financial and Enbridge operate in very different industries, they all appear to be reasonable companies to consider investing in for the long term. If you try to understand what to invest in given the crazy times we find ourselves in today, each of them deserves your consideration. They are all well positioned in their industry, meet the key needs of their clients, and have their own decent balance sheets. With this combination, they could very well last a long time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.