Warren Buffett once famously declared that his "favorite holding period is forever" for "outstanding businesses with outstanding managements." That quote has become a mantra for long-term buy and hold investing, but it doesn't mean that investors should blindly hold stocks amid deteriorating fundamentals or disruptive threats. In this article, I'll discuss two stocks which I personally plan to hold for as long as possible -- Amazon (AMZN -2.56%) and AT&T (T 1.10%).
Source: Pixabay.
Amazon
Shares of e-commerce giant Amazon have soared more than 220% over the past decade. Although past performance doesn't guarantee future returns, I don't believe that Amazon's growth will end anytime soon for two main reasons.
First, its Prime ecosystem, which drives its e-commerce and digital revenues, continues to grow by offering customers free shipping, discounts, e-books, videos, and other perks. Amazon continues to expand Prime's presence with set-top boxes, smart speakers, ordering buttons, and connected appliances -- which will all enhance its presence in smart homes.
Research firm CIRP recently estimated that Prime's total U.S. members rose 35% over the past year to 54 million. The firm believes that Prime members spend an average of $1,100 per year on Amazon, compared to just $600 for non-members. Over the next few years, the combination of Amazon's warehouse robots and delivery drones could dramatically reduce logistics costs -- a key concern during last quarter's earnings.
An Amazon Prime Air drone. Source: Amazon.
Second, Amazon has stabilized its bottom line growth with AWS (Amazon Web Services), the largest cloud platform in the world. AWS had an annual run rate of nearly $10 billion at the end of 2015, and generated 39% of Amazon's operating profits last quarter. Morgan Stanley estimates that AWS will become Amazon's most profitable business by 2017, and account for 60% of the company's incremental profits. That's why analysts now expect Amazon's annual earnings to grow 41% per year over the next five years.
Amazon bears often claim that the stock looks ridiculously expensive at nearly 450 times trailing earnings. But factoring in AWS' boost to Amazon's bottom line, the stock only trades at 65 times next year's earnings. Since Amazon prioritizes generating more free cash flow to grow its business, its EV/FCF ratio of 34 -- a multi-year low -- indicates that the stock is historically cheap compared to its cash flows.
AT&T
AT&T isn't a great triple-digit growth stock like Amazon, but it's a "dividend aristocrat" which has raised its dividend annually for over three decades. Over the past 12 months, AT&T has paid out 64% of its free cash flow as dividends, and currently pays a forward annual yield of 5% -- more than double the S&P 500's average yield of 2.2%.
That free cash flow won't dry up anytime soon -- its $49 billion acquisition of DirecTV, which closed last July, boosted its 2015 free cash flow 60% to $15.9 billion and turned it into a major pay TV player. AT&T expects the acquisition to become earnings accretive within the first year, and $2.5 billion in annual cost synergies to boost its earnings through 2018. That's why analysts now expect AT&T's earnings to grow 5% annually over the next five years. To gain more pay TV subscribers, AT&T started offering wireless users unlimited data if they signed up for DirecTV. It also recently launched three streaming video bundles directly aimed at Netflix and cord cutters.
DirecTV's apps. Source: DirecTV.
To grow its wireless business beyond mobile devices, AT&T is also expanding into new markets like smart homes, connected cars, and drones. The company connected 1 million cars in the fourth quarter alone, and signed a deal with Ford which could connect "at least" 10 million cars over the next five years. It also partnered with Intel to develop autonomous 4G drones which could be used for deliveries and other tasks in the near future. That growth will likely boost sales at its slower growth business solutions and consumer mobility units over the next few years.
Are Amazon and AT&T right for you?
Amazon and AT&T are very different stocks for different types of investors. Amazon investors need to have faith in its long-term vision of infiltrating smart homes with useful devices and automated deliveries, and that AWS will continue dominating the cloud market. AT&T investors must believe that the aging telco can continue generating fresh sales growth from the pay TV and Internet of Things markets, while keeping its debt levels under control.
I personally believe that Amazon and AT&T can achieve those goals, but investors should do their homework on both stocks before deciding if they are stocks to hold "forever."
