It's pretty common knowledge that investing in stocks is considered the riskiest investment versus other options like bonds. That's a given, though, because the returns you can get from investing in stocks over the long term will far outweigh the gains one can get from other investment vehicles.
That said, that doesn't mean the risks involved in stocks are equal -- some are simply riskier than others. For investors who aren't too big on risky portfolios, there are plenty of low-risk stocks worth considering. Three that stand out as low-risk companies that will also deliver great returns over the long haul are Waste Management (NYSE:WM), WD-40 Company (NASDAQ:WDFC), and Canadian National Railway (NYSE:CNI). Here's a look at why these stocks carry less risk than most others on the market.
There's investment treasure in trash
Few businesses are as durable as those that handle waste. It's one of those services we think nothing of unless something goes wrong. These types of businesses where we instinctively do something as simple as throwing things away can be great sources of shareholder returns in the long run.
Let's face it, no matter how conscious of our waste generating habits; we are going to create trash one way or another that is going to require collection and proper disposal. For Waste Management, that translates to a steady revenue stream the company gets to work with no matter the economic environment. While there is some variance in landfill volumes based on the overall health of the economy, those changes are rather modest compared to many other industries.
So, on the one hand, you have a captive customer that will pay for the service pretty much no matter what, and on the other, you have a business that is hard to disrupt thanks to the high initial capital costs and the regulations & permitting required for new landfills. All of these things combine to give Waste Management a huge leg up over the competition,
The reason all of these competitive advantages translate to a low-risk stock, though, is that Waste Management's management team does a great job of being shareholder-conscious. Even though it is a rather low growth industry, management has been able to squeeze out double-digit returns for more than 15 years -- 2014 excluded thanks to some one-time charges -- that it has used to reward shareholders with growing dividends and a healthy share repurchase plan. Those qualities are more than enough to make Waste Management a low-risk stock.
A product (and a stock) you can't do without
Consumer goods is one of the lower risk industries out there, especially when those goods have high brand recognition and are repeat purchases. Few products fit this bill better than WD-40. Heck, the stuff is so ubiquitous that a common running joke is that anything can be fixed with WD-40, duct tape, and a little paint. Eight out of every 10 households have at least one WD-40 brand product in their homes, and that doesn't even count some of the company's other core brands such as 2000 Flushes, Lava Soap, Spot Shot, and Carpet Fresh.
One of the things that makes WD-40 Company so compelling isn't just its suite of brands, but also the way in which the business operates. The company itself doesn't manufacture any of its own products. Rather, it contracts out manufacturing to third party vendors. This makes WD-40 corporation incredibly asset light and removes many of the fixed costs related to production lines and factories. Therefore, when sales do slump -- although that's a rare occasion as it even grew sales during the Great Recession -- it simply can back down orders from vendors rather than eat the costs of running facilities at low utilization rates.
Also, since the business is so asset light, it provides the company more opportunities to reinvest in things like growing sales or returning cash to shareholders, which has translated into a dividend that has doubled and a 20% lower share count over the past decade.
Shares of WD-40 Company currently trade at a price to earnings ratio of 30, which is a bit high for even a great business like this in my opinion. If you are looking for a low-risk investment over the long term, though, WD-40 Company should be high on your list.
There are so many inherent advantages built into the railroad industry that it is hard to count. When it comes to long-haul transport of goods or trying to carry any bulk material like coal, corn, or chemicals, rail is going to be the preferred choice. The reason being is that moving goods via rail is much cheaper than by truck or air.
If you are looking for a company that is best suited to handle long haul transport, then Canadian National Railway is the company worth watching. It is the only Class 1 rail network in North America that connects to the Atlantic, Pacific, and Gulf Coasts. For customers, this means only needing to contract with one rail company rather than having to deal with multiple rail companies that don't have cross-continental capabilities.
The other thing that makes Canadian National compelling from an investment standpoint is that the company runs a tight ship -- ahem, train -- when it comes to controlling costs and efficiency. A common efficiency metric in the rail industry is called the operating ratio. It's total operating expenses divided by revenue -- the inverse of gross margin. Canadian National's operating ratio is consistently the best in the business and currently stands at 55.9%. The only publicly traded rail company within 10 percentage points of Canadian National's operating ratio is Canadian Pacific.
Like Waste Management, Canadian National's results pretty much mirror the overall economic health of North America. After all, it's moving the goods that drive the economy anyways. So when the economy goes through a rough patch, then the company's results will take a hit. That said, its network isn't going anywhere, and the inherent competitive advantages of rail ensure it will be a primary transportation method for decades to come. Like WD-40, though, Canadian National's stock is a little pricey at 22 times earnings, but that is the price to pay for a high-quality company with little risk over the long term.