Pessimism about future economic growth has caused long-term bond yields to decline to historically low levels. Today, over $15 trillion of bonds trade at negative yields around the world. In this environment, we think the best way for investors to maintain and grow their buying power is to own a concentrated portfolio of high-quality businesses that can deliver strong organic growth even if the economy falters. Entrenched companies with essential products or services can use pricing power to overcome any softness in volumes.
The following three companies are part of oligopolies that have pricing power and should deliver predictable and growing earnings over the next decade:
Fair Issac Corporation (FICO)
The company has a virtual monopoly on consumer credit scores for mortgages, auto loans, credit cards, etc. They have recently begun instituting special price increases for major scores categories (mortgages in 2018 / auto loans in 2019) in addition to more regular annual price increases, which are above the rate of inflation. The cost of a score is still miniscule relative to the size of these credit decisions and gives the company ample room to increase prices in the coming years.
The company is in a natural duopoly with S&P Global. Together, they rate over 90% of the bonds issued in the world. They can be thought of as toll collectors, which charge a percentage of each debt offering amount. There is a tremendous volume of debt that will be issued and refinanced in the next decade. The rating agencies have consistently raised their prices above the rate of inflation for many years yet still represent a small portion of overall debt issuance costs.
The company, along with Mastercard, controls the vast majority of payments transactions around the world. They take a very small piece of each credit or debit card payment. The trend towards electronic payments have led to robust volume growth in transactions, which should continue into the foreseeable future. Despite earlier concerns about new technologies and approaches, the company has positioned itself at the top of the payments “food-chain.” If it can avoid government price controls, the company should have a long path of strong organic growth.
Disclosures: Valley Forge Capital Management owns FICO, MCO & V