TCL, APA and SYD share prices
Shares in these three companies, worth a combined $48.5 billion, have trounced the market or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the past decade.
I think part of the reason can be put down to their stable business models, which yields consistent dividends. But what is it about their businesses that make them ‘defensive’?
No franking credits?
None of these three companies offer fully franked dividends, which is a unique and effective way to pay dividends to Australian tax residents.
Nonetheless, thanks to their ‘wide moats’ they have paid dividends consistently over 4% for a long period of time. Plus, as can be seen above, their share prices have rallied.
A ‘moat’ describes a unique feature of a business that allows them to withstand intense amounts of competition and still make money for shareholders. It is similar to the ‘moat’ of water that surrounded medieval castles.
For example, Sydney Airport Holdings owns Sydney Airport – Australia’s busiest landing strip and the only one close enough for travellers to and from Sydney. That means it can charge airlines and retailers a premium to do business. What other choice do they have?
Transurban is by far the most dominant force in toll road infrastructure in Australia. Its highways are, if anything, too congested.
APA Group is the leading owner of natural gas infrastructure and wind farms. Its gas pipelines connect rural projects to Australia and the world. Its business would hard to replicate, to say the least.
Having a ‘moat’ has enabled these three defensive ASX businesses to grow their cash flows and pay enviable dividends.
Each of these three companies should be on savvy investors’ watchlists, in my opinion. Unfortunately, shares in each of them appear to be fairly valued at today’s prices and, therefore, are not a buy. However, if their share prices fall I’ll be quick to run my ruler over them again because they are fantastic businesses with wide moats and generous dividends.
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The Motley Fool Australia owns shares of Sydney Airport Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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