When asked to describe why he looks to invest in high quality companies, billionaire investor Warren Buffett is fond of saying: – Because I like to sleep well at night. And who doesn’t? For investors, the best way to “sleep well” is to own high quality companies in your portfolio – the types of companies you don’t have to worry might ‘blow up’ or decline, or simply not be there when you wake up in the morning.
Brambles Limited (ASX: BXB), Origin Energy Limited (ASX: ORG) and Woolworths Limited (ASX: WOW) are exactly the type of blue-chip companies you want to own if you value your sleep. Here are three reasons why these quality stocks make such solid long-term investments.
Ten years ago Brambles reported earnings per share (EPS) of 24.5 cents per share (cps). In the current financial year the company is forecast to earn 42.7 cps which would represent growth of 74% over the decade.
Origin earned 26.3 cps in financial year (FY) 2004; EPS is forecast to rise to 67.8 cps in FY 2014, implying growth of 158%.
Earnings at Woolworths in FY 2004 were 66.6 cps and are forecast to rise to 197.3 cps come FY 2014. This implies growth of 196% in EPS.
A growing stream of earnings is a huge advantage for a company and its shareholders. A company can take those earnings and either reinvest them – hopefully creating acceptable returns – or it can pay those earnings out to shareholders.
Where the board chooses to pay out those earnings, a rising stream of dividends should be available. In the case of Brambles, Origin and Woolworths, these three blue-chips are trading on forecast dividend yields of 2.8%, 3.3% and 3.8% respectively.
Strong Balance Sheets
An important factor in passing the “sleep test” is a rock-solid financial position. A review of the balance sheets of these three firms confirms that they are all in strong positions with plenty of cash to meet their short term needs. They have debt which is manageable and long-term in duration, and with the capacity to expand their balance sheets should acquisition options present themselves.