Recurring income is a nice investment theme

May 09, 2019 15:25
After having built up a massive user base, tech firms like Google are able to monetize the traffic in its ecosystem. Photo: Reuters

Most people stick with the same bank their whole life once they open an account with it. They may use the same bank account to receive their salary, pay the mortgage and settle other bills. Switching to another bank may simply be too troublesome.

As most people will see their income and wealth growing with time, that means more business for their banks.

It’s the same case with insurance. Few would cut off their insurance payments, given the costs involved.

Both banks and insurers tend to enjoy recurring business.

In recent years, tech companies also share the same attribute. Why are tech stocks outperforming others in recent years? Because most of these companies have built up a large number of loyal customers and created an ecosystem.

As their customers keep coming back, tech firms would find ways to monetize their customer base once it reaches a certain scale.

Tech firms may not bill their users directly, but as long as there is traffic, there is a way to make money. Advertising is one such source of revenue.

Property management firms are the same in this respect. While there is no pure, listed local property management firm, there are plenty of choices if one wants to invest in such companies in the mainland.

Pharmaceuticals follow the same path. Patients with chronic diseases have to take their medicines for years, for instance. Remember, aging population is going to be a big issue in China.

Coca-Cola, one of the favorite stocks of billionaire investor Warren Buffett, also fits into this category, as drinking the soft-drink has become a habit for its fans.

All these companies earn money on a recurring basis, almost like collecting taxes. That makes them interesting investment targets.

This article appeared in the Hong Kong Economic Journal on May 8

Translation by Julie Zhu with additional reporting

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Columnist at the Hong Kong Economic Journal