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When choosing shares for my SIPP, I think in a timeframe of decades.
Here are two British shares I would be happy to own in my SIPP for decades to come.
Judges Scientific
Judges Scientific (LSE: JDG) is far from being a household name. While its market capitalisation of £754m is sizeable, it is not massive. I reckon Judges still flies below many investors’ radars.
Yet the company’s business performance has been impressive – and I think the best could yet be to come.
The shares have also done spectacularly well. A growth of 293% means they have almost quadrupled in just five years.
On top of that, the company’s dividend has been growing in double dividend percentage terms annually in recent years, although the yield is a modest 0.8%.
Smart business model
So, what is it about the business that makes it special?
It has identified a niche market where quality matters and so customers are therefore willing to pay a premium price: scientific instruments.
By buying up small and medium producers, Judges has aped the approach of Warren Buffett. It can offer financial firepower and management expertise centrally, while letting the acquired companies focus on making and selling instruments.
Like Buffett, Judges has a disciplined approach to valuing companies and so far has a good track record of not overpaying.
Can that last? Ironically, I think one risk to Judges’ continued success is its own success! Competitors spotting its strong performance may also start trying to buy up small instrument makers, pushing up prices for future acquisitions. That could hurt profit margins.
I do not own Judges in my SIPP because I do not think its valuation looks good under the microscope.
A price-to-earnings ratio of 32 is higher than I care to pay even for a quality company like this one. So I have the share on my watchlist, ready to buy it for my SIPP if the valuation becomes more attractive.
British American Tobacco
One share I do own in my SIPP – and plan to keep there for the long run – is British American Tobacco (LSE: BATS).
Why would I keep the share for decades? After all, cigarette demand is in structural decline in many markets. Last year, the company itself said that the long-term value of key brands is likely to be zero. No wonder the shares have fallen by 23% in the past five years!
The thing is, cigarette demand has already been in decline for decades in many markets – but remains substantial.
Last year, British American’s cigarette sales fell sharply but it still managed to shift 570bn of them. Meanwhile, its pricing power means that it can at least partly compensate for falling sales volumes by increasing the price tag. So while cigarette volumes fell 8%, associated revenues fell only 4%.
Meanwhile, the company is rapidly growing its non-cigarette revenues. They grew 16% last year. I think the company’s established brands and distribution network give it a competitive advantage in this market compared to smaller new entrants.
The company is the biggest source of dividend income in my SIPP. It has raised its dividend annually since the last century and yields 9.8%.
