10 Companies With Sustainable Competitive

Advantages For Long-Term Investment

Jun. 02, 2013 6:50 AM ETRBGPF, KO, CL, PG, IBM, LO, XOM, JNJ, ABT, LMT, NSC7
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One of the defining characteristics of capitalism is competition. Indeed competition in
capitalist countries such as the U.S. is so fierce that thousands of companies go out of
business every year since they can't compete effectively. However it should be noted
that "real" competition does not exist in all industries, with some dominated by
oligopolies or even monopolies. In industries where competition does exist, winners and
losers are sorted out by the market.

Firms that have a competitive edge over their rivals thrive in the marketplace and can
exist for a very long time. Public companies that fall into this category can produce
substantial returns for investors as they are able to capitalize on their competitive
advantage. If one or more competitors can copy their ideas or make better products,
then the company that had the competitive edge loses that advantage quickly.

For example, in the cell phone manufacturing industry, U.S.-based Apple

Inc. (NASDAQ:AAPL) was on top of the world last year due to the explosive popularity
of its iPhones and other products. Investors couldn't get enough of Apple's stock,
pushing it well over $700 per share late last year. However, mesmerized by the media
and hyped by Wall Street, investors failed to realize that Apple's competitive advantage
is not permanent. Indeed Apple's main advantage was not in the making of the iPhone
(hardware) but the software that went into it that made operating the device incredibly
easy for a kid, grandma or an adult. Other players in the industry were not going to sit
around and let Apple dominate the industry for too long. Companies such as South
Korea's Samsung Electronics (OTC:SSNLF) went on the offensive by offering cheaper
and even better versions of mobile phones, taking a sizable chunk of Apple's market
share in a short period of time. Accordingly, Apple's stock price has returned to earth
and closed at $449.73 Friday.

Companies that have multiple and sustainable competitive advantages can offer great
returns to shareholders. This includes holding onto to a competitive idea or an
advantage over a long time and not lose it like Apple. I recently came across a
fascinating article by Ruan Stander, a quantitative and equity analyst and portfolio
manager of Allan Gray Proprietary Limited of South Africa.

From the article:

Evidence for sustainable advantages requires a company that has:

1. Been around for a long time.

2. Outperformed the average company consistently.

 3. Not changed a lot over time to distort the analysis.

One company that fits the profile is Coca-Cola (NYSE:KO). The company has been
around for 126 years and has faced capitalism's creative destruction for long enough to
be counted as a fair example. Table 1 on page 7 illustrates how Coca-Cola has been
able to generate value for shareholders over the short, medium and long term beyond
the market average. If an investment in the market in 1919 was worth R1m today, an
equal investment in Coca-Cola would be worth R37m.

Note: The investment return amounts noted are in South African Rand (R).

He discussed three competitive advantages that companies such as Coca-Cola hold:

1. Significant benefits to scale (an industry in which being bigger helps to keep
costs low).

2. A leading market share (capturing the benefits of [1]).

3. A supply chain that is superior and hard to copy for existing competitors.

A supply chain that is superior and hard to copy for competitors with a reasonable
market share

The third point is important since it is the 'moat' that turns 1) and 2) into a money-
making machine for shareholders. For Coca-Cola, the advantages are a bottling and
distribution system that is hard to replicate and a recipe that is widely regarded as one
of the best kept secrets in business.
Source: Buy OUTsurance, Quarterly Commentary, March 2013, Allan Gray

Nine other U.S. companies that have sustainable competitive advantages are listed
below for further research:
I believe most of these companies hold all the three sustainable advantages discussed
by Ruan above using Coca-Cola as an example. However I have not validated them.
But they satisfy at least the criteria that they have been around for a long time.

1. Colgate-Palmolive Co. (NYSE:CL)
 Current Dividend Yield: 2.22%

 Sector: Household Products

In business since 1806, the company owns globally popular brands such as Colgate
toothpaste, toothbrushes, Palmolive dishwashing liquid and many others in the
household products category. In the time period from 12/31/2092 to 3/31/13, the
company's stock yielded a total return of 1169% compared to just 437% for the S&P
500 and 765% for the peer group which includes The Clorox Company (NYSE:CLX),
Avon products (NYSE:AVP), Kimberly-Clark (NYSE:KMB), Procter &
Gamble (NYSE:PG), Unilever NV and plc (NYSE:UL) and Reckitt Benckiser Group
plc (OTCPK:RBGPF).

2. Procter & Gamble Co. (PG)

 Current Dividend Yield: 2.94%

 Sector: Household Products

P&G gets 62% of its sales from emerging markets. Some of the company's products
include items such as toothbrush, toothpaste, paper towels. etc. P&G hasn't changed
much from manufacturing and selling these and other household products since 1837.

3. International Business Machines Corporation (NYSE:IBM)

 Current Dividend Yield: 1.85%

 Sector: IT Services
Founded in 1911, IBM is now more of an IT contract services provider than an innovator
of new technologies. Capitalizing on its coveted patents and core competencies, the
company continues to thrive and earned $104.5 billion in revenues last year.

4. Lorillard Tobacco Company (NYSE:LO)

 Current Dividend Yield: 5.01%

 Sector: Tobacco
According to the company website, Lorillard is the oldest publicly-traded company listed
on the New York Stock Exchange and one of the oldest continually operating
companies in America. Lorillard celebrated its 250th Anniversary in 2010. Founded in
1760, it is the third largest cigarette maker in the U.S..

5. Exxon Mobil Corporation (NYSE:XOM)

  Current Dividend Yield: 2.75%

 Sector: Oil, Gas & Consumable Fuels

Originally founded in 1870, the company today is the world's largest publicly-traded oil
and gas company.

6. Johnson & Johnson (NYSE:JNJ)

 Current Dividend Yield: 3.04%

 Sector: Pharmaceuticals
Founded in 1886, Johnson & Johnson went public in 1944. J&J has increased dividends
for 51 consecutive years.

7. Abbott Laboratories (NYSE:ABT)
 Current Dividend Yield: 1.48%

 Sector: Pharmaceuticals
As a major drug company, Abbott manufactures many products in the areas of diabetes
care, cardiac and vascular diseases, eye care, nutrition solutions, etc. Companies in
this sector naturally have an edge over competitors since they hold the patents for the
drugs they invented.

8. Lockheed Martin Corporation (NYSE:LMT)

 Current Dividend Yield: 4.30%

 Sector: Aerospace & Defense

Lockheed Martin's history dates back to 1909. The company is a world leader in the
aerospace and defense sector with thousands of innovations that are patented.

9. Norfolk Southern Corp (NYSE:NSC)

 Current Dividend Yield: 2.58%

 Sector: Road & Rail

Dating back to 1883, Norfolk Southern hasn't changed much in a very long time other
than many mergers and acquisitions. Today it operates about 20,000 route miles in 22
states and DC serving every major container port in the eastern U.S.

Data Sources:

 Public companies 100 years old or more, USA Today

 Company Sites
Note: Dividend yields noted are as of May 31, 2013. Data is known to be accurate from
sources used. Please use your own due diligence before making any investment
decisions.