Albert Einstein racked up quite a list of scientific accomplishments before his death in 1955. He won a Nobel Prize in physics for a discovery that laid the groundwork for quantum mechanics, developed the theory of relativity, and was so influential a mere letter to the president jump-started the infamous Manhattan Project. Despite his grasp of the universe and power of the atom, he once quipped that the most powerful force in the universe was compound interest.
Investors that have taken a long-term, buy-and-hold approach to wealth-building might not dispute that claim. Owning a stock for years -- or decades -- makes future dividend yields higher, future share growth more powerful, and provides peace of mind compared to the more frenzied buying and selling that seems to dominate investing today. Even better, there's never a bad time to start. Those looking for top stocks of the next decade might want to take a closer look at oil driller EOG Resources (EOG -1.48%), maintenance products specialist WD-40 Company (WDFC -0.54%), and home water technology leader A.O. Smith Corp (AOS -1.56%).
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Profitable oil in any market
Many American oil drillers have begun to prioritize return on invested capital over outright production volume in recent years, and few companies embody that trend better than EOG Resources. The fact that it focused on capital returns during the recent energy market downturn continues to pay dividends for shareholders.
In 2017, the company smashed the average returns of industry peers in four major American oil plays, including a 115% return in the Permian, compared to just 26% for the average driller. And that was with West Texas Intermediate (WTI), the American benchmark, at just $50 per barrel. It's at $64 per barrel right now.
This year the oil driller expects to deliver $1.5 billion in free cash flow and after-tax returns of over 100% if oil prices average $60 per barrel, all while growing production 16% to 20%. But management isn't letting its guard down just because oil prices are moving higher. It wants to further reduce well costs and operating expenses 5% and 7%, respectively.
All that incremental cash flow delivered from continued financial discipline will be put to good use. In addition to strategic growth, EOG Resources is targeting a $3 billion reduction in total debt by 2021, or a roughly 47% reduction from the end of 2017, and annual dividend growth higher than 19%. Successful execution should allow the stock to beat the long-term returns of the S&P 500 -- perhaps by a wider margin than shareholders have enjoyed in the last year.
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A household name with a big growth strategy
Did you know WD-40 was originally created to prevent rust on intercontinental missiles and space rockets? Investors wouldn't know it by looking at the relatively boring business today. Then again, boring can be a portfolio's best friend.
The sleepy business is carried by various formulations of its namesake brands (WD-40 Multi-Use and WD-40 Specialist), which contributed 83% of total revenue in fiscal 2017. A portfolio of high-margin household cleaning products accounted for the balance. But investors can expect an awakening in the next decade if management delivers on an ambitious growth strategy.
WD-40 wants to grow the reach of its namesake brands much, much further. After combining to deliver $318 million in revenue in fiscal 2017, management is targeting $630 million in annual sales from the pair and $700 million in total revenue in fiscal 2025. The plan has finally caught the attention of Wall Street, as demonstrated by the stock's 32% year-to-date rise. The confidence may not be entirely misplaced.
That's because WD-40 has found traction in important markets in the United States, Europe, and even China -- a noteworthy accomplishment given the latter country's homegrown chemical industry. While currency fluctuations have toyed with year-over-year comparisons in recent quarterly periods, the business needs to achieve "only" 8% annual sales growth to hit management's $700 million target in eight years. That's ambitious by historical standards, but early indications look good. There's still a long way to go, but considering the business converts 12% of sales into cash flow, investors might want to keep an eye on this one.
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Invest in a rising global middle class
Similar to WD-40, A.O. Smith runs a pretty boring business, only one dominated by sales of residential water heaters. And once again, boring has been great for long-term investors: The stock has posted total returns of 1,120% in the last decade, compared to 155% for the S&P 500.
While A.O. Smith has a leading market share in the North American market for residential water heaters and commercial boilers, most of its business comes from replacements. That doesn't allow for much growth outside of new construction, which is cyclical, and more recently a trend toward more energy-efficient units. That's been quite all right with shareholders, however, thanks to incredible growth in China, where many households are buying their first water heater.
In 2017, the company generated over $1 billion in sales from China for the first time, and the business is still growing at double-digit clips in the country, aided by sales of residential water treatment and air purification products. (Also important to note: A.O. Smith has a manufacturing facility in China, so sales are insulated from unfolding trade disputes.) That has a lot to do with the company's strong full-year 2018 guidance that calls for 17% year-over-year growth in EPS and $400 million in global water treatment sales, up 33% from last year.
The business has a solid foundation in North America with unit replacements, plenty of profitable growth left to wring out of China's swelling middle class, and global growth from new products. Furthermore, management thinks there's a future opportunity just as big as China in India's rising middle class, although it will be more difficult to gain traction in that market. Nonetheless, A.O. Smith stock has been one of the best investments in the market in the last decade, and is poised to keep that title in the next 10 years.
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Go long and prosper
Einstein may not be remembered as an investor, but his observation on the power of compound interest is salient advice for anyone. It provides a huge advantage to investors that take the long-term view, in addition to providing peace of mind and delivering lower capital gains taxes.
With that in mind, both A.O. Smith and WD-40 have smoked the total returns of the S&P 500 in the last five years and have ample growth ahead in the next decade. And although EOG Resources has trailed the index with dividends included in the last three-year period, exemplary financial discipline in recent years and today promises to change that, especially if management delivers on stated goals to halve the debt and boost the dividend. That's what makes this trio three stocks you can buy and hold for the next 10 years.
