An economic moat isn’t just a term bandied around by top tier investors, but instead is a very real fortress that protects a company’s pricing power and sustains its margins over time.
It’s no mean feat for a company to build an economic moat that stands the test of time because well-capitalized companies are always looking to encroach on their turf.
A good example of such a threat was when Richard Branson launched Virgin Cola in an attempt to dislodge Coca Cola’s grip on the market.
He failed, however, when it became clear that Coca Cola (NYSE:KO) enjoyed a brand advantage that couldn’t easily be dislodged. Simply put, consumers flocked to their favorite cola beverage in droves and weren’t about to switch allegiances.
For Coca Cola, branding and global distribution channels provide a moat that few companies can compete with, let alone disrupt.
These days, with inflation on the rise, what other wide moat companies offer the potential to provide above-average returns?
On top of that, Mastercard is well-positioned to benefit from the increasingly rapid trends toward a cashless society.
The company’s products are built for electronic payments, and its network is naturally capable of handling the large volumes of transactions that arise from that.
This makes Mastercard one of the most likely candidates to prosper from the growing demand for digital payment solutions, ensuring its business moat will last for a long time into the future.
Evidence of Mastercard’s moat is in its return on invested capital metric, which stands at an astonishing 53.3%. In fact, no matter how you analyze MA’s financials they look good. In its most recent quarter, revenues soared to $6.2 billion, representing 14.0% growth year-over-year and operating income was $3.6 billion.
A casual observer might think Tesla is a plain old car company but to those who have studied it, much more lies beneath the surface, providing it with a wide economic moat.
Beyond delivering 1.31 million vehicles last year, Tesla has a technology advantage that traditional automotive manufacturers can only envy. The key to the success at Tesla has been its software capabilities, specifically its ability to transmit over-the-air upgrades that can significantly improve the driving experiences of its customers.
Unlike other legacy manufacturers that were primarily skilled in hardware production, Tesla emphasized its software capabilities equally. Some analysts forecast software subscription revenues for the firm will hit $20 billion before the decade is out.
In addition to hardware production at scale and software subscriptions, Tesla also leads in battery technology manufacturing and energy storage, both of which offer enormous potential.
The company’s Powerwall and Powerpack divisions are expected to generating ever higher revenues at a rapid pace for the foreseeable future, and should in turn boost margins and profitability for the firm.
To-date, Musk has led the firm to enormous commercial success, generating $24.9 billion last quarter and dropping $2.39 billion of that to operating income.
Tractor Supply Company
As one of America’s largest conglomerates, Berkshire Hathaway (NYSE:BRK.B) is widely diversified and operates in a large range of different industries.
The company, built by legendary value investors Warren Buffett and Charlie Munger, is both a massive investment fund and the second-largest insurer in America. One of the company’s most important wholly-owned holdings is Geico Insurance.
Berkshire’s ability to invest aggressively in both public and private companies is protected by a nearly unsurpassed reserve of available cash. The company currently has nearly $147 billion in cash and short-term treasury notes at its disposal.
With interest rates at multi-decade highs, Berkshire can earn a healthy income from this stockpile until it finds attractive investment opportunities elsewhere.
Another factor that safeguards Berkshire’s moat is the long time frame over which Buffett and Munger have made their investments. The company’s famous stake in Coca-Cola, for example, was acquired at a cost basis of just $3.25 per share.
Thanks to the multi-decade period over which Berkshire has held the shares, the company now earns a yield of over 50 percent on its initial investment each year.
The moat that these holding periods create is all but absolute, as few other companies have held securities for as long as Berkshire.
As one of the world’s leading tech companies, Microsoft (NASDAQ:MSFT) has effective moats in several key business areas. In the area of desktop operating systems, for instance, Microsoft’s Windows OS still dominates with a nearly 70 percent market share.
The company’s Office 365 software suite also controls approximately 46 percent of the global productivity software market, with Google Apps being its only meaningful competitor.
In addition to these legacy business areas for Microsoft, the company has also remained at the cutting edge of new technologies.
Alongside Amazon and Alphabet, Microsoft is one of the three majors in the cloud computing space. In the most recent quarter, Microsoft Azure and other cloud services accounted for $3.2 billion of the company’s revenue.
This represented a 20 percent growth over the previous year, indicating that Microsoft has likely not reached the end of its runway in cloud computing.
Microsoft has also emerged as a default leader in the world of generative AI. Thanks to its partnership with the company behind ChatGPT, Microsoft has secured an early-mover advantage in the world of large-scale artificial intelligence.
By 2027, the tailwinds provided by AI growth are expected to help Microsoft reach $100 billion in annual revenue.
Walmart’s (NYSE:WMT) most critical moat during periods of high inflation is its effective lock on the American grocery business. With a market share of 25 percent, Walmart has a larger grocery presence than Kroger and Costco combined.
Thanks to the proliferation of Walmart locations throughout the United States and the company’s cost advantages, Walmart enjoys a virtually impregnable advantage in this industry. The company is also by far the largest physical retailer in the United States.
Turning to the digital market, Walmart accounts for some 6.3 percent of all eCommerce spending in the United States. While Amazon has a large lead over Walmart in online sales, the physical retail giant continues to post steady earnings growth.
Between 2018 and 2022, Walmart’s 12-month earnings per share skyrocketed from $1.75 to $3.23. In the past 12 months, those earnings have continued to rise, reaching $5.20 per share.
Barring unexpected disruptions, Walmart appears to be in a solid position to continue delivering long-term value to shareholders.
A final advantage of Walmart for investors while inflation remains high is the company’s strong, consistent dividend. Walmart shares currently yield 1.43 percent, and the company has raised its dividend annually for 51 consecutive years.
Given that the company’s payout ratio is under 50 percent and its earnings continue to grow, there is a high probability that Walmart will continue raising its dividend going forward.
Even during periods of high inflation and economic uncertainty, Americans are reluctant to give up their morning coffee. For this reason, Starbucks (NASDAQ:SBUX) is a natural option for investors seeking wide-moat companies to resist inflation.
In addition to being the most popular option for Americans to get their morning caffeine, Starbucks is a company with compelling fundamentals.
The company has averaged a net margin of 10.8 percent over the last 12 months, resulting in a net income of $3.28 billion.
Investors will also likely appreciate Starbucks’ attractive dividend. The stock currently yields 2.47 percent. Thanks to its high cash flows and margins, Starbucks is able to pay out nearly 70 percent of its earnings to shareholders in the form of dividends.
Management has been raising the Starbucks dividend for 13 years, and the compounded growth rate over the past three years has averaged 10.3 percent.
While Walmart leads in physical retail and grocery, Amazon (NASDAQ:AMZN) is the undisputed king of the eCommerce market.
Accounting for almost 38 percent of eCommerce in America, Amazon is the go-to option for consumers ordering a wide range of home, personal, sporting and other goods online.
Amazon’s advantages, however, don’t end with its massive eCommerce platform. The company boasts a 21 percent share of the subscription entertainment market as a result of its Prime video streaming service.
Amazon is even the largest player in the fast-growing cloud computing space, commanding 32 percent of the current market.
Amazon is also a nearly ubiquitous brand whose influence is unlikely to diminish anytime in the near future. Nearly one-third of Americans are Amazon Prime members, and about 53 percent of the platform’s customers buy something at least once a week.
Between this level of popularity and Amazon’s massive scale advantages, it’s extremely difficult to see another company taking its place at the top of the eCommerce ecosystem.
Analog Devices (NASDAQ:ADI) is a manufacturer of integrated circuits that controls about 13 percent of the market for analog ICs. While this puts it in second place to the dominant Texas Instruments, it’s worth noting that Analog Devices maintains an edge in the arena of custom IC manufacturing.
With a net margin of 29.2 percent and a forward P/E ratio of just 17, Analog Devices also stands out as a potentially attractive value buy.
Over the coming 5 years, analysts expect the company’s earnings to grow at a compounded rate of about 8.8 percent. While far from massive, this growth rate is likely sustainable in a wide range of different market environments.
Like several other companies listed here, ADI rewards its shareholders with a healthy dividend. The stock’s yield currently sits at exactly 2 percent.
Over the past 10 years, the payout has grown at an annualized rate of 9.7 percent. ADI has also been raising its dividend for 21 consecutive years.
At just 46.7 percent, the current payout ratio appears to leave management room to continue this string of increases going forward.
One of the key arguments in favor of analog chip makers like Texas Instruments and ADI is that they aren’t faced with the heavy competition weighing on digital semiconductor companies.
While NVIDIA, TSMC and others battle it out over the next generation of cutting-edge chips, the analog majors will likely continue to generate good earnings growth by turning out much-needed products.
Although this market in unlikely to see the kind of wild swings other chip manufacturers are subject to, analog chip producers may be appealing to investors seeking stable companies with well-established moats.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.