Investing in companies with a sustainable competitive advantage is often cited as a shrewd investment strategy. I believe this strategy is logical, as companies with a competitive advantage in their industry have the opportunity to generate abnormally high returns without the risk of competitors entering the market to erode profits.
When dealing with companies that have a competitive advantage, it is still important to consider the price that must be paid to buy shares. Waiting for a reasonable price should ensure better returns over the long run.
ASX 200 companies with a competitive advantage
Identifying ASX 200 companies with a competitive advantage is not a straightforward process. Nevertheless, I believe ASX Ltd (ASX: ASX), Cochlear Limited (ASX: COH), SEEK Limited (ASX: SEK) and Sydney Airport Holding Pty Ltd (ASX: SYD) all likely have a competitive advantage in their respective industries. Over the last 10 years each of these companies has generated an average annual rate of return in excess of 14%, with SEEK generating a return above 20%. These stats bode well for the investment strategy of investing in companies with a competitive advantage.
The 'Big Four' banks in Australia are also often cited as having a competitive advantage. Over the last 10 years, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all averaged an annual rate of return of between 8% and 13%. These results take into account any share price impact from the Banking Royal Commission.
Woolworths Group Ltd (ASX: WOW) is another company that would appear to have a strong competitive advantage, along with its rival Coles Group Ltd (ASX: COL); however, over the last 10 years, Woolworths has only been able to generate an average annual rate of return of 6.5%.
Foolish takeaway
From looking at these companies and their average annual rates of return we can see that investing in companies that appear to have a strong competitive advantage can be profitable. However, high returns are not guaranteed, as we can see from the performance of Woolworths.
I believe this strategy is still worthwhile, but attention needs to be paid to the price of the shares and the ongoing performance of the business.
