Three Stocks That Won’t Be Replaced by the iPhone
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every so often a big company with a powerful brand goes bankrupt because of changing technology in its industry. Eastman Kodak Company, once a powerful brand in the film business, went bankrupt in 2012. Kodak used to sell canisters of film by the thousands daily. But those days are long gone as consumers turned to digital cameras to make photographs.
Today hand-held devices such as the iPhone have replaced so many products. An all-in-one device, you have the clock, GPS system, phone, digital music player, Internet, camera and movie-making technology. On top of that, there are thousands of new applications for the iPhone. So how do you buy stocks that can’t be replaced by a new app or new technology? In this article we examine three stocks that can’t be replaced by the iPhone.
Consumer non-cyclical stocks are a great sector in which to hunt for companies with strong loyal customers. Consumers buy chocolate, peanut butter and cleaning products regardless of how the economy is doing. Two of my favorites in this sector are Coca-Cola (NYSE: KO) and Hershey (NYSE: HSY).
Both have deeply entrenched name-brand recognition and distribution channels worldwide. Both have long histories of creating shareholder value through growing sales and raising dividends. Both sell products that loyal customers buy and consume again and again and again.
Hershey’s penetration into the chocolate confectionary market is mammoth. Babies grow up learning the names of Hershey’s Milk Chocolate bar, Kit Kat and Reese’s Peanut Butter Cups. One risk is a bad cocoa crop. Supplies of cocoa beans, grown in certain regions near the equator, have been decent in the 2012-13 season.
Last month, Hershey raised its quarterly dividend 15.5% to $0.485 per share. Annualized, this dividend adds up to $1.94 per share or a 2% yield on a $96.59 stock.
Cherry Coke: A Buffett favorite
Coca-Cola has been one of Warren Buffett’s largest holdings for more than 20 years. Buffett has been known to drink several Cherry Cokes during his annual meetings.
In 2011, Buffett noted Coca-Cola paid about $376 million in dividends to Berkshire Hathaway, up $24 million from the previous year. “Within 10 years, I would expect that $376 million to double," he wrote.
Coke, over a 10-year period, can incrementally raise prices of its products while trying to sell additional volumes in the 200 countries where it does business. The rising prices and growing volume allow the company to raise its dividend.
A year ago, Coke split its stock 2-for-1 at $80 a share. The stock has been trading at or near the after-split price ever since. Net income in the second quarter dipped to $2.68 billion, or $0.59 cents per share, from $2.79 billion, or $0.61 cents per share, a year earlier. Revenue in the quarter dropped 3% to $12.75 billion. The company blamed weather as partly responsible for Coke's decline in revenue, earnings and volumes in the second quarter. Europe has been a tough market for Coke lately. But over time I expect Coke to rebound with growing revenue and earnings. Coke stock at $40.37 per share yields a 2.8% annual dividend.
Industrial manufacturing and transportation are affected by changing technology. Technology, in theory, is used to enhance the service, desirability, efficiency and safety of planes, trains and automobiles. My favorite in this sector is Union Pacific Railroad (NYSE: UNP).
Union Pacific has several core advantages including free land from the government when the railroad was founded. UP’s real estate -- some was acquired through acquisitions -- covers 32,000 route miles in 23 states in the western two-thirds of the United States. It is virtually impossible for someone to acquire the land and build a competitor with faster route miles through the same geography.
There are other railroad competitors, but UP is the superior railroad with a healthy mix of freight -- merchandise, chemicals, grains and raw materials -- being moved daily. The crude-by-rail play continues to benefit UP.
With strong earnings so far this year, UP was able to raise its third-quarter dividend to $0.79 per share, or 14.5% more than the $0.69-per-share payout to investors made last quarter. The regular dividend payment equates to a $3.16-per-share annual dividend, yielding 1.9% on a $162 stock.
The railroad’s three biggest risks are the economy, accidents and flooding, which can destroy track and bridges. A declining economy forces the railroad to cut expenses. During the Great Depression of the 1930s, several railroads put workers on part-time status to survive. Some railroad workers were laid off during the recession of 2008-09, but most have been called back and railroads are hiring again.
Foolish bottom line
If you are worried about your stock being replaced by a new form of technology, buy stocks in companies that are virtually impossible to duplicate and will likely be around many years from now. Hershey, Coca-Cola and Union Pacific each have been around over 100 years and will likely be around another 100 years. All three have been able to raise prices without losing customers. All three stocks have long histories of raising dividends. Buy and hold these stocks for life. They probably will outlive you.
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Michael Hooper owns shares of Coca-Cola, Union Pacific, and The Hershey Company. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!