Why Some Stocks Are Worth Owning 'Forever'

Brad Briggs's picture

Tuesday, September 13, 2016 - 12:00am

by Brad Briggs

What do Coca-Cola (NYSE: KO), Campbell's Soup (NYSE: CPB) and Deere & Co. (NYSE: DE) all have in common?

In short, they've all survived some of the biggest economic catastrophes the world has ever seen. While thousands of business have come and gone since the early 1900s, these companies have managed to prosper through more than a century of political and economic turbulence.

So what's allowed these companies to continually generate wealth for shareholders despite two world wars, the Great Depression, and countless bull markets and recessions?

It's simple: They all belong to a select group of investments that we like to call Forever Stocks.

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For those of you aren't familiar, Forever Stocks is a distinction we've come up with at StreetAuthority for companies that have rewarded shareholders for generations. Not only do these companies often sport durable brand names and impenetrable economic moats, but their strong competitive advantages have led them to consistently outperform the market for decades.

It's not just the companies themselves that have stood the test of time. The products they make have remained virtually unchanged. In some cases, the same products have been serving customers and generating wealth for over 200 years.

While high-flying tech or pharmaceutical companies have to come up with the next fancy gadget or life-saving drug every few years, Forever Stocks don't share in this burden.

Likewise, Forever Stocks don't deal in financial wizardry like "collateralized debt obligations" and other hard-to-understand financial products. Their businesses are simple enough for a 5th grader to understand. Forever Stocks simply produce valuable, quality products that you probably use every day. And that's what leads these stocks to trounce the S&P 500 year after year.

Of course, as you can imagine, given the historic nature of these companies and length of the time they've been in business, there aren't many that truly qualify for Forever Stock status.

In fact, they're so rare that my colleague Jimmy Butts recently identified only seven of his absolute favorite Forever Stocks in total for his latest report.

Unfortunately, out of fairness to Jimmy's subscribers, I can't reveal the names of these stocks today. But I can give you a couple of examples of Forever Stocks not named in his report to show you exactly what I'm talking about. 

Forever Stock #1
One company that might be considered a Forever Stock is CSX (NYSE: CSX). It's been a leader in freight rail transportation for more than 180 years.

Its roots go back to 1827, when the Baltimore and Ohio Railroad Co. (B&O) chartered the first common carrier train in the United States. During the Civil War, the railroad moved Union troops and supplies and was the target of attacks. Bridges were burned and rebuilt, tracks were torn up and replaced, telegraph lines pulled down and restored. By the end of the 19th century, the B&O had built almost 5,800 miles of track and connected Chicago and St. Louis to Baltimore, Philadelphia, New York and Washington, D.C. 

Today, CSX is a $26 billion company operating in the eastern United States. It owns 21,000 miles of track. The company hauls coal, chemicals, intermodal traffic (shipping containers) and other merchandise.

CSX's status as a Forever Stock comes from a few key points...

First of all, like most railroad companies, CSX owns irreplaceable assets.

The network of track that CSX has in place is virtually impossible to replicate. CSX spans the densely populated eastern United States, capturing about half of the rail volume in the region. Its rights of way and installed track form a nearly impenetrable barrier to competition from other railroads.

Shipping by rail is also less expensive than trucking for long distances. It is four times more fuel-efficient per ton-mile. Today's trains can move a ton of freight more than 430 miles on a gallon of diesel. Railroads can be notoriously expensive to maintain, but CSX has done a great job at keeping costs down. Capital expenditures amounted to about 20% of revenue in 2015.

And although railroads spend large amounts of money on their infrastructure, a dollar spent on railroad infrastructure has historically offered a more certain (and lower-risk) return than a dollar spent on infrastructure in other industries. Simply put, without rail operators like CSX, commerce would be much more expensive.

Let's look back to the most recent economic crisis -- remember, I said the true test of a Forever Stock is how it fares during times of war, recession or uncertainty. CSX managed to raise its dividend in both 2008 and 2009. In fact, over the past decade, the company's dividend has increased by 729%. And it's supported by a rock-solid payout ratio of 35% over the past 12 months.

If that weren't enough, look how CSX has performed over the past 10 years -- especially when you compare it with the S&P 500.

The S&P has posted a more than respectable 65% return over the past 10 years, but CSX has blown it out of the water with a 242% return. Not bad for a "boring" railroad stock.

While nothing is assured, CSX should keep delivering impressive returns through good times and bad. That's the power of Forever Stocks.

Editor's Note: If you don't already own Forever Stocks like CSX, then it's time to consider adding them to your portfolio. We've put together a special presentation that tells you everything you need to know about our absolute favorites, including information on how to get the names and ticker symbols of Jimmy's list of 7 Forever Stocks. To learn more, click here.

Brad Briggs does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.