I really wouldn’t recommend putting your pension in only one stock, but if you treat every investment as if if were your only one for the rest of your life, it would really help you focus on quality.
I’d be tempted by Warren Buffett’s Berkshire Hathaway. But that would be cheating, as it’s really buying a whole bunch of separate companies. The same for investment trusts here in the UK too — I love such trusts, but again they’re effectively investments spread across many companies.
For a one-only single company investment, I’d be looking at two aspects — the nature of the company itself, and its fundamental performance. There’s a school of thought that says the actual nature of the business can be ignored, and such Strategic Ignorance coupled with good fundamentals can indeed be successful.
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Essentials
But for a single investment, I’d want to know I’m going for something essential — that is, civilisation as we know it cannot exist without it. So that’s things like food, energy, finance, housing, clothing, transport, medicine… But I’m going to rule out banks right away, as we’ve seen how painfully easy it is for a big bank to go bust.
Ubiquitous global retailers like Unilever have provided great investments for decades and should continue to do so, but I also want long-term barriers to entry. And I don’t mean just companies that can squeeze out all upstart competition, as that would be stifling progress. I want ones with the ability to exploit new progress by, for example, acquisition. To me that brings it down to two key sectors — oil and pharmaceuticals.
Our two pharma giants, GlaxoSmithKline and AstraZeneca, both come very close for me. But if all of the world’s major pharmaceuticals researchers disappeared tomorrow, we’d carry on just fine with the drugs we already have (and which generic manufacturers could continue to make).
Big oil
So I’m pretty sure my money would go on one of our two oil giants — and for no other reason than the size of the company, my pension choice would be Royal Dutch Shell (LSE: RDSB). With a market cap of approximately £210bn, Shell is by far the biggest company in the FTSE 100 (and possibly the least likely to ever go bust), and isn’t far from being twice the size of BP at around £109bn.
On the fundamentals front, Shell is a huge cash cow. Right through the oil price crisis it still kept paying its dividends, even while disposing of some non-core and underperforming assets. And with strong EPS growth back on the cards now, dividends are getting back towards being healthily covered by earnings.
Bargain price
On a P/E valuation based on forecasts, Shell shares look pretty cheap too. The multiple of 12 suggested for 2018 is cheaper than the long-term FTSE 100 average, and you get significantly better than average dividends for that. And if that’s a bargain, a P/E of 10 based on 2019 forecasts must be a steal, yes?
But wait, what about the ever-growing switch to renewable energy? Well, that’s only happening slowly, and I’m sure oil won’t go out of fashion before my need for my pension ends. And Shell is one of the pioneers of renewable energy too, with the ability to grow that sector through its own R&D and through acquisition.
