In times of market turbulence, there is an awful lot of value in “set it and forget it” kinds of stocks. These are mature businesses that probably aren’t going to see huge revenue growth, but can consistently generate results that can add up to market-beating returns. Infrastructure is an industry chock-full of slow-growing businesses, but even among these slow growers, there are some that stand out as great stocks to hold for the long term.
If you’re an investor looking to add some “set it and forget it” stocks to your portfolio for the next decade, then you may want to consider Federal Signal Corp (NYSE:FSS), Canadian Pacific Railway (NYSE:CP), and Waste Management (NYSE:WM). Here’s why.
A signal to buy
It’s kind of hard to imagine that a business as simple and unheralded as selling street sweepers and alarm systems would be one of the best-performing stocks of the past decade, but Federal Signal has produced a staggering 936% total return over the past decade. The formula for those returns wasn’t that complicated, though: Generate modest organic revenue growth, continually manage costs to expand margins, make opportunistic acquisitions, keep the balance sheet healthy, and return cash to shareholders.
The company has historically been tied to municipal and infrastructure spending, but management has tried to diversify away by acquiring businesses that give it greater exposure to industrial clients. Three acquisitions it made in the past year — a dump truck body manufacturer, a specialty vehicle manufacturer for the metals mining industry, and a landscaping and waste hauling vehicle manufacturer — are examples of this, and now management expects annual revenue to be a 50-50 split between municipal and industrial customers.
Management’s plans for the future aren’t that much more complicated than what it has done in the past. It anticipates high-single-digit revenue growth, EBITDA margins in the 12% to 16% range, and keeping capital expenditures in check to free up cash on the balance sheet. It pays a modest dividend, but it generates plenty of cash to cover it, and management has board authorization to buy back shares equivalent to 3% of its current market cap.
To put a little cherry on top: Management’s incentive plan doesn’t allow them to exercise stock options for 10 years, so management’s investment timeline is in line with a decade-long investment thesis.
A history of market-beating results with a big acquisition upside
There is nothing particularly exciting about the railroad industry, but it has been and continues to be one of the most cost-efficient ways to move goods over long distances. It may be a capital-intense business, but railroads that have been able to maintain quality service and run an efficient network have been able to generate impressive returns for their respective investors over the long haul.
While there are several railroads that could be mentioned here as a good stock to buy for a decade, one thing that stands out for Canadian Pacific is the proposed acquisition of Kansas City Southern and how it could transform the company. Canadian Pacific has been one of the more efficient railroad operators in the industry over the years.
It was one of the earlier adopters of a set of operating principles known as precision scheduled railroading (PSR) to increase the utilization of locomotives and reduce downtime in terminals. These protocols have helped the company produce some of the better operating statistics in the business, with an operating ratio (operating costs divided by revenue, a common railroad industry metric) of 57% for the full year 2020.
The combination of Canadian Pacific and Kansas City Southern will create the only integrated railroad network serving the U.S., Canada, and Mexico, which will help to significantly reduce transit times for international shipments and create new markets like direct Canadian grain shipments to Mexico. What’s more, Kansas City Southern has been a later adopter of PSR, so there will also be some operational gains from implementing Canadian Pacific protocols across both networks.
All told, management estimates a $1 billion increase in operating synergies from competitive shipping routes and operational efficiencies. That’s a lot of upside in a company with a proven market-beating track record.
A great business in an unheralded industry
There are few businesses as durable as handling trash. For one, barring a complete societal shift on consumption or some yet-to-be conceived technology, recycling and landfills will be the dominant methods for handling refuse for years and likely decades to come. Being in the trash business is a challenging one, but, like railroads, it can be extremely lucrative for those that do it right.
Waste Management has been doing it right for decades, and has rewarded its investors along the way with great returns. Again, there is no secret sauce that has led to this gain, just exceptional operations year-in, year-out. Revenue grows modestly from increased tipping fees (the price to dump something in a landfill) and negotiating new removal contracts with municipalities, and management has been able to supplement that by acquiring smaller operators along the way.
Where it really excels, though, is in managing costs. One example was converting a large portion of its waste collection vehicles to run on the methane that its landfills produce, turning a liability (methane emissions from decomposing trash) into a low-cost fuel.
It’s things like this that have kept costs in check and led to the business generating loads of cash that management can use to make acquisitions, pay dividends, and reduce the share count through share repurchases. At the end of last year, the company increased its dividend by 13% and authorized a new $1.5 billion share repurchase program.
Waste Management doesn’t have to do anything revolutionary to generate great results — it just has to keep doing what it’s doing today. That’s the kind of bet you want to make when investing over the long haul.
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