Buying and holding great businesses usually produces higher after-tax returns than trading in and out of average businesses. Therefore, it behooves investors to seek out and buy the best businesses, such as PepsiCo (PEP 3.62%), McDonald's (MCD -0.05%), and J&J Snack Foods (JJSF 1.03%), and own them forever.
These are businesses that have earned exceptional profits doing one thing very well for a long time and will continue doing that one thing well for decades into the future. Notice you will not find Apple or BlackBerry on this list, but you will find proven and predictable businesses that can compound shareholder value at a high rate for years to come.
Unbeatable brands - PepsiCo
PepsiCo(PEP 3.62%) is the first stock you should consider owning forever and it is not hard to see why. The company is the No. 2 global soft-drink company and the No. 1 global snacks company. It owns more iconic brands than any other company in the food and beverage industry, including Pepsi, Cheetos, Doritos, Tostitos, Ruffles, Aquafina, and Gatorade.
PepsiCo derives half of its revenue from snacks and the other half from beverages. It has a durable competitive advantage in both businesses but has a better foothold in the snacks business. According to Morningstar, PepsiCo controls 64% of the U.S. salty snack market and 40% of the global market. Such enormous scale enables it to defend its market position from smaller competitors.
As a result of the company's large and stable share of the markets in which it competes, shareholders have been rewarded with steadily growing free cash flow per share. The key metric has compounded at an annual rate in excess of 8.5% since 2003.
In addition to dividends and share repurchases, the company is boosting shareholder return by expanding into emerging markets and by changing its portfolio to include healthier brands. Investors who buy and hold PepsiCo forever will reap the rewards of slow and steady value creation.
Consistently golden - McDonald's
McDonald's(MCD -0.05%) is the second stock that all investors should consider owning forever. Ray Kroc championed the idea of consistency across all restaurants so that a customer could walk into a McDonald's anywhere in the world and expect the same meal. This idea enabled McDonald's to grow into the world's largest restaurant chain, now ubiquitous in nearly all developed countries.
The company's unmatched scale enables it to earn a much higher operating margin than competitors -- its operating margin exceeded 30% in recent years while Yum! Brands, Wendy's, and Jack in the Box earned less than half of that.
In addition, the company is perennially ranked as one of the top restaurant franchises, enabling it to easily recruit qualified franchisees to expand its store base at relatively little expense.
As a result of its unrivaled scale and broad consumer appeal, McDonald's nearly quintupled earnings per share since 2003.
Moreover, the company still has room for growth. With fewer than 2,000 stores in China, McDonald's has a long runway for growth in the emerging economic superpower. As China, Brazil, and other nations join the economic elite, McDonald's earning power will continue to grow.
The best business you never heard of - J&J Snack Foods
The next business is the most exciting on the list because it is the most boring. J&J Snack Foods(JJSF 1.03%) sells ICEE, SUPERPRETZEL soft pretzels, and Parrot-Ice, among other snack foods commonly found in movie theaters and convenience stores. It is a simple and boring business -- the best kind to own forever.
Demand is stable, its profit margin hardly moves from year to year, and it typically holds an inordinately large amount of cash on its balance sheet. Despite these things, J&J consistently increases revenue and earnings per share by making prudent acquisitions of small snack companies.
The trend of increasing earnings per share suggests that past acquisitions have generally been accretive to earnings. Moreover, longtime CEO Gerald Schreiber owns 18.5% of the company, providing ample incentive to continue making prudent acquisitions that accrue to shareholders.
Bottom line
Great companies compound shareholder value at a high rate over time. The longer an investor owns a stock, the more closely the total return approximates the company's rate of increase in value per share rather than the initial earnings yield at which the stock was purchased.
Therefore, dare I say it, it hardly matters what price you pay for a great business if you plan to own it forever. Investors who buy -- and never sell -- PepsiCo, McDonald's, and J&J Snack Foods will likely earn a higher return than if they had used a more active strategy buying average businesses. Think hard and consider doing just that.
