When it comes to investing in the stock market, finding a business with great long-term prospects is one of the most important things. This is true whether the ambition is growth or passive income.
That means sticking to companies that have a durable competitive advantage. And I think Experian (LSE:EXPN) is the best example of a FTSE 100 stock that meets this condition.
What does Experian do?
Experian collects data on consumers and uses them to form a credit score. It then sells this to lenders – typically banks – to allow them to make an accurate assessment of a potential borrower’s creditworthiness.
There are a few reasons I think Experian has a durable business. The first is the size of its database, which is what makes its assessments accurate and is extremely difficult for competitors to emulate.
The company doesn’t have the market to itself – Equifax and TransUnion also produce credit scores using their own data and methodology. But lenders tend to view these as complementary, rather than competitive.
One reason for this is that the standard in the US has been for mortgages to require all three reports, but that’s shifting to a requirement for only two of them. That presents a challenge for Experian.
Value for money
There’s a danger that demand might slow if mortgages in the US don’t explicitly require an Experian credit report. But I think the company is well-positioned to deal with this risk.
The price of an Experian report to a bank is relatively low – certainly in comparison to the size of a consumer mortgage. It’s therefore a relatively small price to pay to reduce the risk on a large loan.
That makes me think demand for the company’s products will remain strong, even if it isn’t a formal requirement. It provides value for money to its customers, which should prove durable.
On top of that, there’s the emergence of artificial intelligence (AI). As I see it, the currency of the AI revolution is likely to be data and the size and scale of Experian’s database is likely to prove extremely valuable.
Future income?
With a dividend yield of 1.26%, Experian doesn’t look much like a typical passive income stock. But the key with investing is not to focus on what’s going on today, so much as what will be the case in future.
I’m expecting significant growth from Experian’s dividend. Over the last decade, it has been growing at 7.6% a year and I think demand for mortgages over the long term is likely to mean there’s scope for future growth.
If I bought 2,284 shares, I could earn £1,000 in passive income. And a 7% annual dividend increase would take me to £3,869 after 20 years.
At today’s prices, that would cost me £77,519, which is a big outlay, but I wouldn’t have to buy them all at once. By investing gradually and reinvesting the dividends I earned, I could build my stake in the business over time.
The best FTSE 100 stock to buy?
Experian’s dividend might not look like much right now, but it might be the FTSE 100 stock with the most durable competitive advantage. That’s why I think it could be a great passive income idea to consider for the long term.
This post was originally published on Motley Fool
