There aren’t too many ASX shares that I’d feel comfortable about buying and committing to owning for two decades.

But there are a few that I think could be solid ultra-long-term picks. They have shown their worth in the coronavirus so far. 

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

Soul Patts could be one of the best ASX shares to invest for the long-term in. Only an exchange-traded fund (ETF) may have a better claim.

It has already been listed on the ASX for over a century, so it clearly has great longevity. But I don’t think it’s on the cusp of irrelevance at all. It’s an investment conglomerate so it can change its investment holdings as time goes on. Soul Patts is apparently about to start investing in regional data centres, a big growth area right now. Current large investments include telecommunications, building products and resources. 

Of the current shares in the ASX 200, I think Soul Patts could be among the group that will operate for the longest time into the future.

The management team of Soul Patts themselves invest for the long-term within the company. So it has long-term characteristics. It is steadily increasing its dividend, which is another attractive future.

Xero Limited (ASX: XRO)

There are only two things certain in life (as the saying goes). Death and taxes. You can’t do a business tax return without tracking your income, expenses, assets and liabilities, then making financial statements. So why wouldn’t you want to use the best tools available?

Xero is an ASX share that provides cloud accounting software and it’s resonating with clients across the world.

It’s no surprise that Xero has a strong market share in New Zealand and Australia as it’s a local business with a great service. But it’s also growing at an extraordinary rate in the UK and doing well in other areas of the world.

Xero generates attractive monthly cashflow at a very high gross profit margin. At the moment Xero is investing heavily for growth and it’s paying off. In two decades (or just one) it could be one of two clear market leader providers in the world.

Wesfarmers Ltd (ASX: WES)

Wesfarmers isn’t normally an ASX share I’d suggest is one of the best dividend shares, or one of the best growth shares. But I think it’s a great blue chip.

It isn’t stuck being a bank or a miner. It will happily adjust what operating businesses it owns over time. Remember that it acquired and years later divested Coles Group Limited (ASX: COL). Wesfarmers isn’t afraid to make big, bold moves. Even if they don’t work out – look what happened to Bunnings UK and Ireland.

The point is that Wesfarmers can acquire businesses to position it for future success. For example, it recently acquired a lithium miner and it also acquired online retailer Catch Group.

Of course, its current businesses are also fantastic. Bunnings may be the best retail businesses in the country.

Foolish takeaway

I think all of these ASX shares would make very good ultra-long-term investments at the current prices. Xero may be able to generate the most growth if it keeps adding subscribers, but I prefer Soul Patts for its diversification.

More reading

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• Why Woolworths shares are offering a rare buying opportunity today
• These ASX shares are set to get a big boost from the next big government stimulus

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Yesterday, I explored how some of the current issues facing the ASX banks could be impacting their ‘bankability’. But to understand how banks are valued in the first place, you need to recognise how they differ from other type of stocks. For example, unlike regular industrial stocks, banks make money from borrowing, lending and aiding the flow of money throughout the economy. This makes them highly vulnerable to the economic cycle, and as an investor you need to know when they’re out of the money.

You need to tread carefully when using a price-to-earnings ratio (P/E) and dividend yield to gauge how attractive ASX bank shares might be. That’s because bad debts or one-off items can compromise the sustainability of bank dividends, as shareholders discovered in 2007 when they were slashed to help prop up badly needed bank capital.

It’s also important to understand that banks require some peculiar evaluation criteria when it comes to assessing their intrinsic value and business performance. If you do want to use the P/E ratio to help value and compare one bank share against another, then it must be used alongside some bank-specific financial ratios.

While some valuation principles are equally applicable to all companies, there are a number of complications specific to banks. These include determining leverage – due to being both borrower and lender – regulatory impact, capital expenditure and interest margins.

Key ratios

Net interest margin (NIM): A bank’s primary income source is the difference between the interest income from its loan book, and interest paid out to depositors. Typically expressed as a percentage of the average loans outstanding over the period under review, this is known as the ‘net interest margin’ (NIM). A high ratio indicates bank efficiency. While you won’t find it in official financial statements, most banks disclose this average somewhere near the front of their detailed annual reports.

Cost to income ratio: Measures a bank’s operating expenses as a percentage of its total income. The lower the ratio, the better the bank is at controlling costs and most brokers prefer banks with a cost to income ratio of less than 50%.

Bad debts ratio: Measures a bank’s provisioning for when a client can’t meet their repayments and a debt goes bad. The higher the number of bad loans, the higher you really want the net interest margin to be, otherwise it could wipe out a hefty chunk of profit.

Return on assets: As a useful efficiency measure for banks, ROA indicates how profitable a bank is relative to its total assets. Calculated by dividing annual earnings by its total assets, ROA is displayed as a percentage – the higher the better – and should reveal how competent management is at using its assets, like mortgages to generate earnings.

Tier 1 capital ratio: Is a litmus test of a bank’s capital strength. It’s arrived at by isolating the amount of ‘tier 1 capital’ – the highest quality capital – then identifying the proportion of ‘risk-weighted assets’. Capital ratios in the big four and Macquarie range between 10.8% and 12.2%.

Price to book ratio: Is the value you would see if the business was liquidated and liabilities paid out. A ratio of 1 indicates shareholders can only expect a return of book value. A ratio above 1 indicates the extent to which shareholders are potentially exposed to market risk.

Standout ASX bank shares to buy now

Based on its forecasted pre-provision operating profit per share growth over the next 3 years, Goldman Sachs’ preferred major bank exposure is National Australia Bank Ltd (ASX: NAB). It expects NAB’s revenue momentum to remain superior to its peers, driven by its overweight exposure to SME lending. While NAB has taken the lowest provision for bad debts, at 0.38%, its credit impairment charge as a percentage of loans is also considerably lower than its peers.

At a share price of $17.95, the bank is still trading 40% down on its 52-week high of $30.00. Goldman Sachs also reiterates a buy on Australia and New Zealand GrpLtd (ASX: ANZ) shares, which at $18.05 are still trading 38% down on their 52-week high of A$29.30.

Based on its strong deposit franchise, Commonwealth Bank of Australia (ASX: CBA) is seen as more vulnerable to the medium-term impact of lower rates. The bank also has the highest exposure to more competitive mortgages relative to its peers. Based on a valuation that’s more expensive in relative and absolute terms, Goldman Sachs concludes that NAB and ANZ offer a more attractive entry point at current levels.

Similarly, while Westpac Banking Corp (ASX: WBC) has demonstrated better expense control, stronger margins, and better than expected housing growth, the stock is not regarded as a buy. This is due to risk of higher investment spend, plus the risk of elevated fines and asset quality deterioration. At $17.36, Westpac shares are trading at a 42% discount to its 52-week high of $30.05.

Market uncertainty over banks’ fortunes is reflected in buy, hold and sell consensus broker recommendations on ANZ, NAB and Westpac. However, brokers unanimously agree that Commonwealth Bank is not a buy, with 12 out of 15 seeing it as a strong sell.

Despite the recent rally, bank share prices still suffer from a negative sentiment overhang that pre-dates COVID-19. Yet if the GFC is any proxy, the post-crisis period bodes well for the sector.

More reading

• The big oil price recovery and bounce in ASX oil stocks are bringing out the bears
• 5 things to watch on the ASX 200 on Tuesday
• I don’t normally buy ETFs, but I would buy these 2
• Where to invest $10,000 into ASX shares immediately
• How bankable are the big four ASX bank shares in 2020?

Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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