Just a handful of firms in the FTSE 100 have defensive, growing businesses that tend to show resilience to the effects of macroeconomic cycles. I am happy to invest in those firms until the day I retire and beyond, with a reasonable expectation that my total return will be positive.
If you are looking for buy-and-forget investments that can help you grow your funds while you get on with your life, it's worth considering these few well-positioned companies. Today, I'm looking at two of them: Shire (SHP) and Unilever (ULVR).
How to spot a great business
Great businesses often reveal themselves if you look at their cash flow statements. Shire and Unilever both have a good record of generating reliable and growing net cash from operations that tend to come in around the level of earnings. In other words, their earnings are supported by real cash flows.
That's important, because it takes cash to pay dividends, and regular, growing dividends will be a big part of the total return I'm expecting over the years from these firms. Profits showing in a profit-and-loss statement are not good enough if not backed by real cash. Without cash backing, the risk is that profits in one period might be erased with the stroke of an accountant's pen in the next period. Cash is king for the handful of great FTSE 100 firms worthy of buying and holding until retirement and beyond.
Shire and Unilever perform well with cash-generation because they deal in consumer goods, I'd argue. 'Essential' items with short life spans can lead to customers repeat-buying often and that's what makes cash flow so reliable and predictable. Shire deals in medical treatments and Unilever in hygiene and food products. People tend to keep buying such items even during economic recessions and that's what makes these firms defensive from an investment point of view.
At the other end of the scale, Many companies deal in goods and services that people don't buy as often, or which they avoid altogether when times are hard. Think of cars, clothes, washing machines and estate agent services. Cash generation from such cyclical firms can be lumpy and that can lead to volatile profits, dividends and share prices. To me, those firms don't qualify as investments to hold on to until you retire -- the total return outcome is too unpredictable.
Rising income and growth
Shire and Unilever both have a strong record of using their reliable cash flow to pay steady and rising dividends. Shire's dividend cover from earnings runs at more than 14 times, suggesting the firm sees opportunity ahead to invest its cash flow in order to grow the business. As well as that, there is great potential for the firm to raise the level of the payout relative to earnings in the years to come. Meanwhile, Unilever's forward dividend yield for 2017 runs at around 3.4%, and I think the two make a complementary pair for inclusion in a well-balanced portfolio.
With both companies recently reporting rising sales and making positive noises about their outlooks, I think they are worth your time analysing, with a view to buying the shares for the long haul.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.