It’s not uncommon for parents or other family members to put something away for children when they are born. These days, interest rates available from the banks are very low. I’ve selected two companies that I think together will return far more than a bank account in the 20 years it takes a baby to grow into an adult. The chances of permanent capital loss are, in my opinion, very low over that timeframe.
The first company I’ve chosen is the one of the oldest companies listed on the ASX. Washington H Soul Pattinson (ASX: SOL) is an Australian conglomerate that has interests in a number of other listed companies. It owns the majority of coal miner New Hope Corporation (ASX: NHC), and has a cross-holding in Brickworks (ASX: BKW).
The conglomerate has diverse holdings. As well as blue-chip shares, it also has major holdings in small-cap biotech Clover Corporation (ASX: CLV) and up-and-coming telco TPG Telecom (ASX: TPM), to name just a couple. The company trades on a P/E ratio of 19 at current prices, but this isn’t particularly informative because earnings retained by the many investee companies do not contribute to the statutory earnings of the parent company.
Conglomerates often trade at a discount to the value of the assets they hold, but arguably Washington H Soul Pattinson is currently trading at too great a discount. One indication of this is that the founding family, the Millners, have bought almost $1.5 million worth of shares on-market recently, and another director, David Wills, has just spent $139,500 buying shares of the company.
Washington H Soul Pattinson is a good choice for your children because it will pay substantial dividends, and special dividends over the next 25 years. The company has a very strong balance sheet, and is run by honest and competent managers. I believe that over the long term, returns will easily beat cash, without unpalatable risk.
My other choice for the next 20 years is a much smaller company, and there is slightly more risk involved with this investment. Vocus Communications (ASX: VOC) owns infrastructure that is unlikely to be replaced for many years to come. The company runs data centres in all the major cities and has a network of fibre optic cables connecting Australia’s major central business districts to each other. The Vocus network connects to the rest of the world via the Southern Cross Cable that runs under the Pacific Ocean. The growth prospects of this company depend on demand for private fibre optic connections, known as ‘black fibre’.
One consideration is that the company’s current right to capacity on the Southern Cross Cable expires in 2025. While the company was built on this asset (which it rents to other ISPs), the domestic fibre and data businesses are becoming more important, and margins should improve once the fibre that is already installed is utilised more heavily.
I don’t think the market fully understands that the new fibre optic networks will be around for a very long time indeed. Most investors simply aren’t considering whether the assets will still be valuable in 40 or 50 years. However, I believe that fibre optic networks will likely be in greater demand in 40 years, especially for corporate clients for whom security is paramount. I believe the market will be paying a premium for the longevity of these assets by the time today’s toddler is an adult.
Although Vocus does not currently pay a significant dividend, I think the shares will appreciate significantly over the long term. Washington H Soul Pattinson will provide a regular dividend and some capital appreciation. Both companies currently trade at reasonable prices, and deserve a spot on any investor’s watchlist.
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Motley Fool contributor Claude Walker owns shares in Vocus and has an interest in TPG Telecom through a managed fund. Find him on Twitter @claudedwalker.