When you buy a stock you plan to hold for the long term, ask yourself this. If the stock market closed tomorrow for five years, would you be worried?
I have to admit that some of my holdings would be different if I knew I wouldn’t be able to sell them before 2022. So today I’m going to look at two companies I would buy if I couldn’t sell for the next five years.
Strong volume growth
A long-term investment needs to be a business that won’t go out of fashion, or be made redundant by new technology.
I’m fairly sure that meat-packing firm Hilton Food Group (LSE: HFG) fits this description. This £559m company operates across Europe and in Australia. Customers include most of Europe’s major supermarkets.
Today’s first-half results show a solid performance so far this year. Total volume rose by 8.7% to 160,848 tonnes, while revenue rose by 9.3% to £690.7m. The group’s operating profit rose by 9% to £18.8m, giving a 2.7% margin that’s consistent with the group’s long-term performance.
Although these figures were boosted by exchange rate movements, both revenue and profit growth were positive, even after the cost of setting up new facilities in Europe and Australia.
This performance highlights one of the firm’s main attractions, its high return on capital employed (ROCE). This is a measure of a company’s operating profit, relative to the value of its assets.
Hilton Food has a ROCE of about 30%, which is unusually high. What this means in practice is that investment in new factories tends to be repaid with extra profits very quickly.
Today’s figures seem to confirm this. Net cash rose from £32.3m to £38.9m during the first half of the year. The interim dividend has been increased by 8.7%, in line with the five-year average growth rate of 9%.
Hilton Food’s stock trades on 21 times forecast earnings, with a prospective yield of 2.5%. That’s not cheap, but I think the firm’s track record suggests that it is still worth buying.
Essential goods
Another business with a foothold in the food industry is Avon Rubber (LSE: AVON). The group’s dairy division makes rubber fitments used for milking cows. But Avon also has a second division, Protection & Defence.
This business makes gas masks for military and civilian markets all over the world. The company’s products encompass chemical, biological, radiological and nuclear hazards. Sadly, I suspect they are likely to remain in demand throughout my lifetime.
Like Hilton, Avon ticks the boxes for a quality business. The group’s average ROCE since 2011 has been 26%. Net cash was £12.6m at the end of March and the dividend has risen by about 26% per year over the last five years.
The group’s share price has pulled back this year and the stock currently trades on a forecast P/E of 14.5, falling to a P/E of 13.8 in 2018.
Although the yield is low at around 1.3%, the payout was covered six times by earnings last year. I’d expect dividend growth to remain high for the foreseeable future.
If I had to lock up my portfolio and throw away the key tomorrow, I’d probably buy some Avon shares today.
