Wednesday, October 19, 2011

Seven wide-moat dividends stocks to consider

Wide-moats, or strong competitive advantages exist in almost every industry. It is very difficult to take away market share from such companies, because they have strong consumer loyalty and strong brand names synonymous with being the best at what they do. These features protect the companies from competitors, and help them generate high returns on equity and charge higher prices to consumers.

Lowest Prices

Wal-Mart (WMT) is the most successful retailer in the world. The company has marketed itself as the lowest price retailer for almost everything consumers spend money on. The sheer scale of Wal-Mart (WMT) (analysis) has enabled it to squeeze lower prices from suppliers and increase operating effectiveness. In addition, its massive investment in technology has enabled to retailer to deliver the right goods when they are needed most. As a result it would be very difficult and costly to emulate the company’s business model. Check my analysis of Wal-Mart (WMT).

Strong Brand Names

Coca-Cola (KO) (analysis) has a portfolio of drinks, most prominent of which is Coke. It is a strong global brand, and consumers are willing to pay the premium to buy the product. It is true that there are alternatives to Coke from Pepsi (PEP) (analysis), but any Coke drinker would surely tell the difference between the two. I personally enjoy Coke and would never drink a Pepsi, although I own shares in both stocks. Furthermore the quality of Coca-Cola drinks is another reason why generations of consumers worldwide are buying the company’s drinks.
Another company with a strong portfolio of brand names includes Philip Morris International (PM) (analysis), which sells cigarettes and other branded tobacco products outside of US. The addictive product


Medical Device and Pharmaceutical companies spend billions in R&D in each year in order to address health issues for patients worldwide. Once a new drug is introduced, it undergoes years of trials and testing before hitting the market. After a patent is granted to the pharmaceuticals company, typically for a period of 20 years in the US, the company can pretty much charge as much as it wants to consumers. The reason is that there are few substitutes for most drugs, until generic competition starts eroding market shares. It is very rare that big pharma companies introduce competing drugs treating the same conditions. Companies with strong patents include Abbott Laboratories (ABT) (analysis) and Johnson & Johnson (JNJ) (analysis).

Geographic Location

Another type of competitive advantage exists when a company has a virtual monopoly at a particular geographical area. A prime example of that includes utilities companies such as Con Edison (ED) (analysis) or pipeline companies such as Kinder Morgan (KMP) (analysis). When consumers in New York need electricity, there is only Con Edison to supply this service to them. When oil and gas producers need to move their product between terminals, they don’t have a choice but to use the strategically positioned pipelines from companies like Kinder Morgan. It is so prohibitively expensive to set up the infrastructure for utilities and pipelines that making the investment in a parallel infrastructure would not be profitable.

Full Disclosure: Long all stocks mentioned above

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