A monopoly is a business that faces little or no competition and is the sole provider of its product or service, with no close substitute. A monopoly status is typically entrenched by high barriers to entry such as cost and regulation. Such businesses have the ability to set a price of their choice for their product or service with no fear of losing customers.
Warren Buffett said it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. As it were, the following three wonderful companies can be seen as a kind of monopoly for the buy and hold investor:
Auckland International Airport Ltd (ASX: AIA) is the largest airport in New Zealand, and so most visitors to New Zealand pass through its asset. It handles close to 10 million international passengers and nearly 9 million domestic passengers annually. In addition to owning the airport, it is gradually building a large industrial, commercial, and retail precinct around the airport on land it owns. Sydney Airport Holdings Pty Ltd (ASX: SYD) maintains a similar monopoly advantage although that could erode over time once the Badgerys Creek airport is operating.
ASX Ltd (ASX: ASX) operates Australia’s national securities exchanges. This includes the provision of a market for trading equities, bonds and derivatives as well as counter party clearing, registry and settlement services. Even if potential competitors could overcome the regulatory hurdle of setting up a rival exchange in Australia, the ASX still enjoys the advantages of the network effect that make it difficult for participants to leave (similar to Facebook).
Transurban Group (ASX: TCL) is a leading toll road owner/operator, with a portfolio of toll road assets on the Eastern seaboard of Australia and in Virginia, U.S.A. Its toll roads have fixed concession lives, with toll roads handed back to their respective governments debt-free at the end of the concession. The weighted average concession life of the portfolio is close to 30 years.
Companies with monopoly style businesses can be a great addition to the buy and hold investor’s portfolio. Investors however, will need to consider that at times these companies come with high debt or more limited growth opportunities given the bond-like nature of their cash flows.
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The Motley Fool Australia has no position in any of the stocks mentioned. 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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