The idea behind successful long-term investing is simple: simply own a portfolio of growth stocks that can generate consistent increases in revenue and net income. Over time, the company’s steady growth will translate into a higher stock price, providing investors with attractive capital gains.
One advantage is that dividend-paying companies with better fundamentals will eventually increase their dividends, so investors can enjoy the best of both worlds.
These are the types of companies I hold for years, or even decades, because they can help compound my money.
Of course, it is important to identify companies with attractive characteristics that are worth owning for the long term. These companies should have a strong competitive position and be dominant players in their respective industries. They should also demonstrate healthy top and bottom line growth over multiple years and consistently generate free cash flow.
With these characteristics in mind, I own three stocks that I never plan to sell.
1. Mastercard
MasterCard (NYSE: MA) is a payment processing company with approximately 3.4 billion debit and credit cards issued worldwide. The company is one of the two dominant payment companies in the world, the other being Visaand had a 27.4% market share in the U.S. in 2022, up from the five-year average of 22%, the Nilson Report said.
Mastercard has posted solid financial results with revenues rising from $18.9 billion in 2021 to $25.1 billion in 2023. Net income rose from $8.7 billion to $11.2 billion over the same period and the company is also generating strong free cash flow with an average of $9.9 billion generated over the three years. Mastercard also increased its quarterly dividend by 16% year-over-year to $0.66 at the end of last year, marking more than a decade of consecutive dividend increases.
The strong performance continued in the first half of 2024. Mastercard saw revenues rise 10% year over year to $13.3 billion, while net income rose 20.4% year over year to $6.3 billion. The good results were attributed to robust consumer spending and a rebound in tourism, which drove cross-border transaction volume up 17% year over year for the second quarter of 2024. Free cash flow came in at $4.1 billion, up 2.6% year over year from $4 billion in the previous comparison period.
Given Mastercard’s solid reputation and track record, I am confident that the company can continue to grow steadily in the coming years while continuing to increase its dividend.
2. Alphabet
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is the parent company of Google and has a dominant market share in the Internet search space with its Google Search. The company also offers a cloud service (Google Cloud) and owns the video sharing website YouTube. I like the company because of its strong market share in Internet search, which allows it to serve targeted ads to its customers.
Alphabet has posted solid financials, with growth on both the top and bottom lines. Revenue rose from $257.6 billion in 2021 to $307.4 billion in 2023, while operating income rose from $78.7 billion to $84.3 billion over the same period. Net income was impacted by one-time adjustments such as gains and losses on equity and debt securities, but stripping those out would have also increased steadily over the three years. The company also generated an average of $65 billion in positive free cash flow per year.
Alphabet’s strong performance has continued into the first half of 2024. Revenue rose 14.5% year over year to $165.3 billion, while net income rose 41.5% year over year to $47.3 billion. The company continued to generate free cash flow of $30.3 billion for the half and recently initiated its first-ever quarterly dividend of $0.20 per share.
There could be more to come from Alphabet, as it launched Gemini last December, its most advanced artificial intelligence (AI) model to date. The new model is capable of more advanced reasoning and can better understand and analyze information, resulting in better search results. The company updated Gemini with new features in May, and this generative AI trend could boost the company’s profits and cash flows over time.
While investors may be concerned about the significant amounts of money Alphabet has to spend on research and development, I believe the company is well-positioned to harness the power of generative AI, integrate it into its products and services, and ultimately monetize it, helping the company grow and improve customer loyalty.
3. Adobe
Adobe (NASDAQ: ADBE) is a software-as-a-service company that operates platforms that allow users to manipulate photos, design web pages, and edit videos and images, among other things. The company is also famous for its portable document format (PDF), which has gained widespread adoption worldwide for all forms of documentation.
Adobe’s financials show that the company is doing well and growing steadily. Total revenue rose from $15.8 billion in fiscal 2021 to $19.4 billion in fiscal 2023, with net income increasing from $4.8 billion to $5.4 billion during the period. Like Alphabet and Mastercard, Adobe is also adept at generating free cash flow, with an average free cash flow of $7.1 billion from 2021 to 2023.
The company has continued to grow, with revenue hitting a new record in the second quarter of this fiscal year. For the first half of fiscal 2024 (ending May 31), revenue rose 10.8% year-over-year to $10.5 billion. Operating and net income were down year-over-year due to a $1 billion termination fee for Figma, but would have increased 18.1% and 25.6% year-over-year, respectively, excluding that fee. Free cash flow was healthy at $3 billion for the trailing six-month period.
Adobe has also jumped on the generative AI bandwagon with the release of its AI-powered assistant, Adobe Firefly. The latest Illustrator and Photoshop releases include Firefly features that help save users time and enable designers and creators to use the tools to create unique designs and perform complex edits. Such features should increase the platform’s appeal to users and help Adobe attract more subscribers to its software.
Elsewhere, Firefly is also included in Adobe’s business-to-business (B2B) Journey Optimizer to personalize experiences for buying groups responsible for key purchase decisions. The feature helps well-known brands such as Accenture, IBMAnd Microsoft in coordinating and organizing deals to gain insights. Generative AI has the potential to introduce many more features into Adobe’s products to help its customers, driving more spending in the future. These features also increase the attractiveness of Adobe’s platform to new customers. The company has good potential for further growth and I believe it can continue to grow its net income and free cash flow over time.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Royston Yang has positions in Adobe, Alphabet, and Mastercard. The Motley Fool has positions in and recommends Adobe, Alphabet, and Mastercard. The Motley Fool recommends the following options: long Jan 2025 $370 calls on Mastercard and short Jan 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
3 Great Stocks I’ll “Never” Sell was originally published by The Motley Fool
