The 24 best international companies to own: 2022…

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Editor’s Note: This article is based on Morningstar’s 2022 Best Businesses to Own. These are companies available to US investors. Find the complete list of companies and discover our selection methodology.

Investors from almost all regions of the world exhibit some degree of home bias, that is, the tendency to prefer domestic equities over international equities. This makes sense: investors are probably more familiar with these brands and, therefore, more comfortable investing their money in them.

But in today’s investing world, “adding international exposure is one of the first steps toward a diversified portfolio,” according to Morningstar portfolio strategist Amy Arnott. If, for example, the US dollar weakens, exposure to European or Asian stocks can mitigate the impact. So how can investors approach international investing given this lack of familiarity?

First, it’s important to remember that at Morningstar, we don’t view investing through the prism of daily price movements or sound advice. We consider owning a single share to be similar to owning a small part of the business, or the underlying business, itself.

Consider the amount of effort we put into researching and comparing options before buying a mattress. It tends to be a lot, and it tends to meet our needs well, exceeding expectations and providing a good night’s sleep. This is the same approach we take to buying a stock.

One of the best ways to identify high-quality companies is to check the Morningstar Economic Moat Rating, which rates a company’s competitive advantage. The term was coined by Warren Buffett, who also said, “The key to investing is…determining a given company’s competitive advantage and, more importantly, the sustainability of that advantage. Products or services that have large, enduring moats around them are those that offer rewards to investors.

We used the Morningstar Economic Moat Rating as a starting point to compile a list of the best businesses you can own. As the top companies in our universe of coverage, they have a large economic moat, the strength of their competitive advantages is stable or increasing, they have predictable cash flows, and they allocate their capital efficiently. (You can read more about this methodology.)

24 companies based outside the United States made the cut. Of those, five are Canadian and look for an article focused on those companies later this week. Here is the full list:

Company Name

Teleprinter

Sector

business country

Anheuser-Busch InBev SA/NV

BUD

defensive consumer

Belgium

Ambev S.A.

ABEV

defensive consumer

Brazil

Canadian National Railway Company

CNR

Industrial

Canada

Canadian Pacific Railway Ltd.

CP

Industrial

Canada

Royal Bank of Canada

RY

Financial services

Canada

The Toronto-Dominion Bank

TD

Financial services

Canada

Waste Connections Inc.

WCN

Industrial

Canada

Yum China Holdings Inc.

YUMC

Cyclical consumption

China

Novo Nordisk A/S

NVO

Health care

Denmark

Dassault Systemes SE

DASTY

Technology

France

Sanofi SA

SNY

Health care

France

Ferrari S.A.

RACE

Cyclical consumption

Italy

Nestlé SA

NSRGY

defensive consumer

Swiss

Novartis AG

NVS

Health care

Swiss

Roche Holding SA

RHBY

Health care

Swiss

ABB SA

ABB

Industrial

Swiss

Taiwan Semiconductor Manufacturing Co

TSM

Technology

Taiwan

Unilever APIs

UL

defensive consumer

UK

Reckitt Benckiser PLC Group

RBGLY

defensive consumer

UK

Diageo PLC

WD

defensive consumer

UK

GlaxoSmithKline PLC

GSK

Health care

UK

AstraZeneca PLC

AZN

Health care

UK

BAE Systems API

BAESY

Industrial

UK

Consumer defensive and healthcare are the most represented sectors on this list, with six companies each. Industrials follow closely with five companies, and the technology, financials and consumer discretionary sectors each have one.

This is a notable difference from the US names on our Top Companies list, where the majority of companies are in the industrial sector. Financial services and technology are tied for second place, while the defensive sectors of health care and consumer goods come in third and fourth respectively.

One caveat, though: this list is not a call to action for you to buy all of these companies immediately. Rather, it’s a list of stocks you should keep an eye on and look for attractive entry points. Even the biggest company can be a bad investment if you pay too much, and many companies on this list are currently overvalued.

That said, as of January 12, two companies on the list have earned five-star ratings, meaning they are undervalued by our fair value estimates.

These are the Belgian company Anheuser-Busch InBev (BUD), the maker of Budweiser and Corona beers, and the Chinese subsidiary of Yum Brands. Yum China Holdings (YUMC) which operates brands like KFC and Taco Bell in China. Let’s look at both in detail.

Anheuser-Busch InBev (BUD)

Anheuser-Busch InBev, or AB InBev, has made acquisitions, having entered into transformative deals for Interbrew and Anheuser-Busch, and most recently acquiring Grupo Modelo, Oriental Brewery and SABMiller. Management’s strategy is to buy brands with a promising growth platform, expand distribution and ruthlessly cut the company’s costs. The payback period for the SABMiller deal was much longer than usual, despite management managing costs well. We expect the M&A playbook to be suspended for another year or two until AB InBev releases its balance sheet.

Yet previous acquisitions have created a behemoth with vast global scale as well as regional density. AB InBev has one of the strongest cost advantages in our defensive consumer coverage and is among the most efficient operators. The vast global scale, along with its monopolistic positions in Latin America and Africa, gives AB InBev significant fixed cost leverage and sourcing pricing power.

AB InBev is well positioned to exploit secular growth in several of its markets. In Latin America and Asia, which together account for nearly two-thirds of consolidated EBIT, consumers are moving towards premium global brands, and ABI has a strong portfolio with Budweiser, Corona and Stella Artois. Developed markets, on the other hand, are likely to remain fragmented and competitive.

-Philip Gorham, Morningstar Equity Director

Yum China (YUMC)

The resurgence of COVID-19 cases has once again put China’s restaurant industry under pressure. Several cities have reverted to citywide quarantines and travel volume at the start of Chinese New Year has fallen by 70%, putting pressure on the company’s short-term results. Nonetheless, we think investors should find confidence in restaurants: owning the scale to be more price aggressive in the near term; provide their customers with greater access through robust digital ordering, delivery and drive-thru capabilities; and who have healthy balance sheets when looking for opportunities in the restaurant industry.

In our view, Yum China meets these investment criteria, and we identify several opportunities for it to gain share in the fragmented $700 billion Chinese restaurant market. In China, chains account for about 17% of restaurant spending, compared to 61% in the United States and 34% globally. Our belief in the growing penetration of fast food is underpinned by three long-term secular trends: longer working hours for urban consumers; rapid increase in disposable income; and increasingly small families.

While 2021 will still present disruptions related to COVID-19, we believe management’s longer-term goals of single-digit system sales growth, restaurant margins of 17% and EPS growth of low to mid-19 are realistic (if not slightly conservative) given favorable China. changing consumer demographics and the operational leverage inherent in its business model. Coupled with Yum China’s dividend (a quarterly cash dividend of $0.12 was reinstated in Q4 2020) and future share buybacks, we believe Yum China offers investors above-average potential.

-Ivan Su, Morningstar Senior Equity Analyst

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