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2 ASX stocks to hold forever

Commonwealth Bank of Australia (ASX: CBA) and Woolworths Limited (ASX: WOW) are two of Australia’s largest and most well-known companies and should form the core of a long-term investor’s portfolio. Both companies have huge economic moats and an impressive history of consistently increasing earnings and dividends year on year.

1. Commonwealth Bank of Australia

Commonwealth Bank of Australia is Australia’s lowest risk bank and the best performing of the big four Australian banks over the past decade. During the height of the GFC, the bank’s earnings and dividend fell by only 14%, which highlights the company’s strong balance sheet and defensive and diverse revenue stream.

Some analysts believe the bank is over-leveraged to the Australian housing mortgage sector, however my view is that this is the bank’s greatest strength, with concerns of a housing crash in Australia greatly exaggerated.

The bank continued to deliver strong earnings growth for first half of FY14, delivering a cash profit of $4.25 billion, up 14% on the prior period. Importantly for investors, the dividend increased by 12% and now offers investors an attractive 5% fully franked dividend yield. The result was very strong and continued the bank’s consistent performance of increasing profits and dividends. Importantly, the key revenue drivers of loan growth, net interest margins and fee and trading income all displayed positive growth.

With Australian credit growth forecast to expand, earnings should also continue to expand in line with credit growth going forward.

2. Woolworths

Woolworths remains the dominant player in the Australian supermarket sector and occupies a 22% greater trading area than rival Coles. Woolworth’s large moat gives the company substantial cost advantages over its competitors.

The company has recently diversified into the home improvement market with its joint venture Masters rollout with Lowe’s. This is a substantial growth opportunity for the company given the fragmented nature of the Australian home improvement market where the largest leading market share is currently occupied by Bunnings at only 16%. Woolworths aims to be the second-biggest hardware retailer within the $42 billion market.

Woolworth’s largest division, food and liquor, continues to perform well and press home its competitive advantage. Sales for the first half of FY14 increased by 4.8%, with 23 supermarkets opening during the first half. Woolworths plans to open 37 additional stores for FY14 with a long-term goal of opening 20-30 stores per year. The food and liquor division continues to generate cost savings from improved supply chain efficiencies.

Woolworths has consistently generated high returns on equity, substantial free cash flow and consistent defensive earnings growth. There are no signs at present that this trend will stop anytime soon.

Foolish takeaway

Commonwealth Bank and Woolworths are arguably the two safest long-term stocks on the ASX. Both companies will continue to deliver rising earnings and dividends for many years to come. Investors looking for long-term growth should buy these companies now and benefit from a rising share price and dividends.

 

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Motley Fool contributor Bradley Murphy owns shares in Commonwealth Bank and Woolworths. 

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