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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows
| October 2016
Whether you are an index investor or a would-be market beater, there are some names out there that are musts when it comes to stocks to buy.
Call them bedrock stocks. These are equities that every serious long-term portfolio should own. We’re talking about companies with massive market capitalizations, tremendous cash flow and the ability to be a dominant player in their respective industries.
In many cases these stocks are going to be helped by powerful, secular demographic and technological trends. In others, they simply have a near inviolable position in the old economy. Either way, their best days are still ahead of them.
It’s also worth noting that given enough time, every business’s growth prospects slow. At that point, they can transition to becoming generous vehicles for income. That is, if they have the scale and cash flow to make good on a steadily rising dividend. Indeed, some of these names already do.
After examining the market for mega-cap stocks, these 10 names stood out as foundational investments. If the have anything in common, it’s that they are must-have names to serve as the bedrock of any long-term portfolio.
Long-term profit growth is annualized and based on analysts' earnings growth projections for the next five years.
Rob DiCaterino via Flickr
Market Cap: $639.5 billion
Long-Term Profit Growth: 7.5%
Apple Inc. (AAPL) isn’t the growth stock it once was, but then no company can maintain a torrid rate of growth over decades and decades. The law of large numbers alone helps insure against that.
But AAPL stock doesn’t need to deliver the kind of returns it enjoyed during the heyday of the iPhone. It’s not like substantial revenue and profit gains are a thing of the past — they’re just more modest now. Equally important, at 13 times forward earnings, AAPL looks cheap.
Perhaps most important for the long haul, Apple is a cash machine with one of the most valuable brands in the world.
SEE ALSO FROM KIPLINGER: 10 Great Stocks for the Next 10 Years
Market Cap: $394.5 billion
Long-Term Profit Growth: 50%
People like to point out that Amazon.com, Inc. (AMZN) doesn’t care about generating profit in the here and now. That’s great, because it means AMZN is investing in the future. It’s refreshing to see a company that looks past quarter-to-quarter performance.
It’s also significant because AMZN, which already dominates in fast-growth e-commerce, is looking to take over so many other key industries of the future. From digital media to cloud-based services to the Internet of Things, AMZN is making big, credible bets all over the place.
It’s exceedingly rare to find a company as massive as AMZN with such an outsized growth rate, not to mention the plans and resources to keep it going.
Market Cap: $355.9 billion
Long-Term Profit Growth: 8.8%
It’s become somewhat fashionable to question whether Warren Buffett has lost his magic. Aside from the fact that the answer is no, Berkshire Hathaway Inc. (BRK.B, BRK.A) will be just fine even after the Oracle of Omaha is no longer with us.
BRK.B is essentially a collection of bedrock companies and investments. That’s a big part of why it has a long-term record of outperformance. Sure, there are times when it will lag the benchmark index, but as a collection of value stocks, it’s designed that way. The point is that it will beat the S&P 500 Index during the down times.
Even without Buffett, the company will remain faithful to its secret sauce. Cheap, quality assets will always be profitable in the long run.
Market Cap: $256.3 billion
Long-Term Profit Growth: 12.4%
As the only remaining original member of the Dow Jones Industrial Average, General Electric Company (GE) is the bluest of blue chips. That the industrial conglomerate is repositioning itself for the future ensures that it will stay one.
GE has shed its financial assets to become a pure-play industrial. That alone will make it easier to understand and more palatable to investors. More importantly, it’s investing heavily in technology.
GE is still in the early innings, but it’s determined to become a top 10 software company. The business is already growing at 20% per year and that’s expected to accelerate.
Market Cap: $555.6 billion
Long-Term Profit Growth: 18.1%
Amazon doesn’t get to claim the future all by itself. Alphabet Inc. (GOOG, GOOGL), which owns Google and a number of other properties, is right there with it.
What AMZN is to e-commerce, Google is to search. That’s critical, because search (as much as any technological innovation<) is indispensable. Google has a lock on it. Other tech leviathans have tried and failed to grab significant market share but it’s been an almost unassailable moat.
Now, remember that the use of mobile products — be they mobile, desktop or embedded in things — is only going to grow. As long as Search remains part of the mix, Google’s position remains an enviable one.
Mike Mozart via Flickr
Market Cap: $323.1 billion
Long-Term Profit Growth: 6.5%
Speaking of the bluest of blue chips, you’ve got to put Johnson & Johnson (JNJ) on a list of bedrock stocks. A portfolio of such names simply has to have exposure to the healthcare sector where JNJ is a long-term gem.
JNJ stumbles from time to time, to be sure, but it always comes back. That’s partly thanks to its diversity. Medical devices, prescription products and consumer goods give JNJ a presence across the healthcare sector. That bodes well for Long-Term Profit Growth given the country’s powerful demographics.
After all, the baby boomers — all 78 million of them — are really getting up there. And by the time the youngest of them hit their sixties, the oldest millennials will be middle aged.
Joe Morgan via Wikipedia
Market Cap: $248.1 billion
Long-Term Profit Growth: 10.1%
Any list of bedrock stocks needs to include the financial sector too. JPMorgan Chase & Co. (JPM), the nation’s biggest bank by assets and market capitalization, is a great place to start.
However, it’s not just that JPM is the biggest. As a preeminent money center bank, it has its hand in everything from retail banking to derivatives trading, giving clients — and investors — exposure to a wide swath of financial products.
Then there’s management. Love him or hate him, Jamie Dimon has proven to be the best bank CEO on the planet. Warren Buffett adores him. That should not be taken lightly.
Market Cap: $241.6 billion
Long-Term Profit Growth: 8.4%
Okay, okay, this is by far the biggest snooze on the list. But investors would do well not to dismiss AT&T Inc. (T) out of hand.
The appeal of AT&T comes down to its lofty position in an industry that’s not going away. Mobile is the future, remember. Just as attractive is that T is an outstanding defensive play.
T routinely has one of the richest dividends in the S&P 500. It also has a long history of hiking the dividend, which is key for an income investor. It’s also far less volatile than the broader market, which provides ballast when stocks are selling off.
An Errant Knight via Wikipedia
Market Cap: $95.5 billion
Long-Term Profit Growth: 9.6%
United Parcel Service, Inc. (UPS) is another big winner in the digital economy. E-commerce is exploding and will continue to do so for a long time. Consider that even the oldest of millennials have yet to hit their peak spending years.
As the largest parcel delivery service with the strongest ground game, UPS has a strong fundamental tailwind at its back. Like all stocks, it will have its ups and downs, but over the longer term the trend is only to the right and up.
As an added benefit, UPS — as well as main rival FedEx Corporation (FDX) — are protected by a wide moat. The capital costs to get a company up and running in this industry are enormous.
Kārlis Dambrāns via Flickr
Market Cap: $193.9 billion
Long-Term Profit Growth: 16.1%
Some of the biggest tech companies in the world — and some non-tech firms, as well — are salivating over the burgeoning market for mobile digital payments. GOOGL, Facebook Inc. (FB) and AAPL are just three of the players jostling for dominance.
Regardless of who ultimately wins, all these payments are going to have to be processed. As the world’s largest payments processor, Visa Inc. (V) finds itself in a strong position to benefit.
Of course this is a secret to no one. Visa, which went public in 2008, has delivered a total return of more than 400% in its comparatively short life as a publicly traded company.
This article is from Dan Burrows of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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