What's the number one characteristic you look for in a long-term investment?
Is it growth potential?
Or perhaps dividends?
What about a visionary management team?
These are all great things but if you ask a successful long-term investor what they look for in a company, more likely than not, they'll say they want to own companies with high returns on invested capital (ROIC).
Put simply, they want a company to achieve a high rate of return on the money it invests.
Believe it or not, many companies aren't capable of doing it to the magnitude and consistency you'd expect. However there are some Australian companies which can…
They consistently deliver high returns across a number of metrics because they have sustainable competitive advantages. They may have patents on technologies, dominant market positions or even superior cost structures, which create large barriers to entry, for both new and existing competitors. Thus allowing them a licence to print cash.
These types of companies have huge asset backing and can carry large amounts of debt with ease. Usually that's not a problem because the cost of debt is usually less than the cost of equity. Again, this allows the company to generate large cash flows and, yep, you guessed it, big dividends.
4 dominant dividend stocks
When an investor thinks of barriers to entry and competitive advantages it's likely a company such as Transurban Group (ASX: TCL) will spring to mind. Transurban is the owner and operator of toll roads throughout Australia and the US. Until air travel becomes feasible for everyday Australians, we'll still be driving on Transurban's toll roads and be forced to pay a rising rate, year-in year-out.
At today's prices, the company pays a partially franked 4.5% dividend. However it also appears to be fully valued. Thus long-term investors will be wise to keep it on their watchlist and wait for a lower entry point.
Sky Network Television Ltd (ASX: SKT) is New Zealand's version of Foxtel, only more dominant. Indeed, at 30 June 2014, SKY's pay television services had a residential household penetration of approximately 48.7% and audience market share of 29.4%. It boasts a 4.4% dividend yield.
A well-known Australian dividend payer is Coca-Cola Amatil Ltd (ASX: CCL). Its competitive advantage is derived from its licence to bottle and distribute the world-class Coca-Cola range of products. It also has an agreement with Beam, for the distribution of its Alcoholic beverages, until December 2023. It is expected to yield a partially franked dividend of 4.5% in the next year.
Last, but not least is APA Group (ASX: APA), which is also expected to pay a dividend equivalent to 4.5%. APA is the owner of gas pipelines and related infrastructure. APA is in poll position to benefit from Australia's booming LNG market, as more and more resources companies send their gas offshore. Like Transurban however, its share price has grown a bit rich and is probably best left on the watchlist.
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At today's prices both Sky and Coca-Cola appear to be good long-term value for their dividend payouts and modest growth potential. However both Transurban and APA are probably best left on your watchlist, for now.
