Investing in companies with a sustainable competitive advantage is often cited as a shrewd investment strategy. I believe this strategy is logical, as companies with a competitive advantage in their industry have the opportunity to generate abnormally high returns without the risk of competitors entering the market to erode profits.
When dealing with companies that have a competitive advantage, it is still important to consider the price that must be paid to buy shares. Waiting for a reasonable price should ensure better returns over the long run.
ASX 200 companies with a competitive advantage
Identifying ASX 200 companies with a competitive advantage is not a straightforward process. Nevertheless, I believe ASX Ltd (ASX: ASX), Cochlear Limited (ASX: COH), SEEK Limited (ASX: SEK) and Sydney Airport Holding Pty Ltd (ASX: SYD) all likely have a competitive advantage in their respective industries. Over the last 10 years each of these companies has generated an average annual rate of return in excess of 14%, with SEEK generating a return above 20%. These stats bode well for the investment strategy of investing in companies with a competitive advantage.
The ‘Big Four’ banks in Australia are also often cited as having a competitive advantage. Over the last 10 years, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all averaged an annual rate of return of between 8% and 13%. These results take into account any share price impact from the Banking Royal Commission.
Woolworths Group Ltd (ASX: WOW) is another company that would appear to have a strong competitive advantage, along with its rival Coles Group Ltd (ASX: COL); however, over the last 10 years, Woolworths has only been able to generate an average annual rate of return of 6.5%.
From looking at these companies and their average annual rates of return we can see that investing in companies that appear to have a strong competitive advantage can be profitable. However, high returns are not guaranteed, as we can see from the performance of Woolworths.
I believe this strategy is still worthwhile, but attention needs to be paid to the price of the shares and the ongoing performance of the business.
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Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Cochlear Ltd. and SEEK 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 Scott Phillips.