Every stock comes with some risks. Even the most dominant company can fade into irrelevance over the long term if too many things go wrong, or if its competitive advantages disappear. Predicting the future is hard, and getting it wrong can be disastrous for your portfolio.
There are some companies, though, that have better shots than others at continuing to thrive over the next 12 years. These companies have durable competitive advantages that are unlikely to vanish, making their stocks safer than most. Here's why you should consider Mastercard (NYSE:MA), United Parcel Service (NYSE:UPS), and Boeing (NYSE:BA) if you're looking for safety.
Low risk, high return potential
Neha Chamaria (Mastercard): You need to have a solid forward-looking thesis to hold a stock with a conviction for as long as 12 years. Think about products and services shaping trends today that could become a way of life a decade from now -- say, online transactions and cashless payments.
Sure, you might have already adopted cashless modes of payment, but do you know that nearly 80% of consumer transactions across the globe are still cash-driven? That won't last forever, given rapid advancements in technology and e-commerce, which is why a stock like Mastercard is unlikely to disappoint you over the next decade or more.
Mastercard and Maestro are global brands in credit cards and debit cards, respectively. As of Dec. 31, 2017, Mastercard had issued 2.4 billion Mastercard- and Maestro-branded cards around the world. Because the company earns fees every time someone swipes its cards, its business can generate strong margins even as it banks on the "network effect" economic moat to expand its reach. Mastercard's returns on invested capital have also been incredibly strong, at 35% or above over the past decade, reflecting a sustainable and lucrative business model.
To keep up with rapid technological advancements, Mastercard is now increasingly focused on future technologies like biometrics, QR codes (a type of two-dimensional bar code), mobile payments, and artificial intelligence. In its most recent quarter, Mastercard's revenue and net income hit record highs. As digitization is the likely future of payments, Mastercard looks well-placed to not only be around in 2030, but also to have earned investors solid returns over time.
Betting on e-commerce
Tim Green (United Parcel Service): All signs point to online retail continuing to grow much faster than retail as a whole over the coming decade. Amazon is a driving force behind this trend, but traditional retailers like Walmart and Target have been investing heavily in their online businesses as well. One way to invest in e-commerce is UPS, a company that provides the fast shipping now expected by online shoppers.
UPS has enjoyed rising package volumes, thanks to Amazon and now other online retailers, but this growth presents its own challenges. The company has been forced to increase its capital expenditures to keep up with demand, and the peak holiday season has proven to be especially challenging. During the first quarter of 2018, operating profit for the U.S. package segment tumbled more than 20% year over year, even as revenue jumped 7.2%.
While these bottom-line challenges are something that investors need to take into account, the growth opportunity for UPS is vast. There are risks, including Amazon's push to handle portions of its own deliveries. But there's little reason to believe UPS won't enjoy growth in package volume for years to come. The stock will react to short-term developments, but it looks like a solid investment for the long run.
Rich Smith (Boeing): I don't think Boeing stock will set the world on fire, exactly, over the next dozen years. After all, the stock is already up 77% over the last dozen months, so a lot of upside has already been priced in. But do I believe Boeing is safe to own until 2030? Yes.
First and foremost, the business is quite safe. Boeing came into this year with a backlog of 5,864 planes ordered and waiting to be built. That was enough work to keep Boeing busy for nearly eight straight years if it ceased booking new orders immediately -- getting you two-thirds of the way to 2030 right off the bat.
Of course, Boeing has not stopped taking orders. In fact, through the end of last week it had booked 221 net new orders in 2018, and made 184 deliveries. Thus, Boeing not only kept orders coming in fast enough to replace the orders it fulfilled, maintaining its backlog; it actually grew its backlog to 5,904 planes. If that keeps up, I see no difficulty at all with Boeing remaining in business through 2030.
As for the "safety" of owning the stock, and not seeing it collapse, that looks pretty secure to me as well. With $12.7 billion in trailing free cash flow (FCF) and an enterprise value (EV) of $197 billion (according to S&P Global Market Intelligence), Boeing trades for an EV-to-FCF ratio of 15.5. The company's projected growth rate is likewise 15.5%, resulting in a perfect 1.0 EV-to-FCF-to-growth ratio -- the very definition of a fairly priced stock.
Assuming Boeing keeps up its growth rate -- which the backlog should ensure -- I think this stock should easily be safe to own until 2030.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neha Chamaria has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN and Mastercard. The Motley Fool has a disclosure policy.