34 Million Reasons Why Buffett Likes Tesco

Published in Investing on 28 September 2011

Warren Buffett has just raised his stake in Tesco.

Last Monday Warren Buffett's Berkshire Hathaway (NYSE: BRK-B.US) announced that it would be buying back its shares in the open market. 

Berkshire has never bought back its shares because Buffett has always maintained that the company can more usefully deploy its capital elsewhere. This has attracted a lot of attention since Buffett is basically telling us that he believes that his company's shares are cheap.

One consequence of this was that another piece of Berkshire-related news which appeared on the same day, that Buffett had added to Berkshire's 3.21% holding in Tesco (LSE: TSCO) by buying a further 34 million shares, has received very little coverage in comparison.

Tesco shareholders should be heartened by this as it represents a big vote of confidence in Britain's number one supermarket chain and bodes well for its future.

All about moats

Buffett likes to own shares in businesses which possess what he calls a "moat"; a competitive advantage like a good brand name and/or economies of scale which protects it from competition. Tesco's moat comes from its being the biggest supermarket chain in the UK which gives it tremendous economies of scale, in particular increasing its bargaining power when it comes to cutting deals with its suppliers.

Tesco is further helped by the British food retailing market having developed into an oligopoly where over three-quarters of the market being in the hands of Tesco and three other firms, Morrison (LSE: MRW), Sainsbury (LSE: SBRY) and Wal-Mart's (NYSE: WMT.US) subsidiary ASDA. This makes it extremely difficult for a competitor to break into the British food retail market and is why the Competition Commission regularly launches probes into the industry.

Show me the money

Tesco shares are up by about 4% since the announcement and, as I type this, they're trading at 379p where they sit on a historic price-earnings (P/E) ratio of 10.6 and yield just over 3.8%.

It's no surprise to me that Buffett is building up his stake in Tesco. He's been adding to Berkshire's overseas investments in the last few years, in part because of concerns over the long-term value of the dollar, and Tesco clearly meets his criteria for a long-term investment.

What buyback?

The last time Buffett made an offer like this was in the 1999 annual report, where he offered $45,000 per "A share." Berkshire's share price rocketed shortly afterwards and no-one took advantage of it by selling their shares at below the market price!

The price that Berkshire will pay has been capped at 110% of Berkshire's net asset value (NAV). In the most recent quarterly report (30 June), the NAV was just under $ 99,000, so buybacks will only take place when the A's are trading at around $109,000, though Buffett will be using a more up-to-date NAV. Since the A's are currently trading at $108,020, it seems fairly likely that Berkshire will buy back some of its shares.

By making this statement, Buffett has effectively put a floor under Berkshire's share price because this implies that he believes that the shares are undervalued (otherwise he wouldn't be buying them). Hopefully for Tesco's existing shareholders Buffett's added interest in their company will send out a similar signal.

More on Warren Buffett:

> Tony owns shares in Berkshire Hathaway. The Motley Fool owns shares in Tesco.

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Comments

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jackdaww 28 Sep 2011 , 9:22am

this isnt just a vote of confidence in teso , but in good companies everywhere.

still adding - to hell with the 10% rule.

HighbrowNick 28 Sep 2011 , 1:32pm

Tesco isn't just the no 1 supermarket group in the UK. They are very big in Hungary, Czech Republic and Poland, and growing in China- so investing in Tesco also gives exposure to these countries.

jasonjarvisgbr 28 Sep 2011 , 2:56pm

tony owns shares in Berkshire Hathaway.

at $100,000 k per.

nice work,


munchkin21 28 Sep 2011 , 3:14pm

As a shopper in Tesco I wouldn't touch their shares with a barge pole at the moment. There so called 'Price Drop' initiative saved me a total of £2.21 on a £150 weekly shop. This is after prices suspiciously went up during August! The same shop the week before cost me £20 less in Morrisons. They also have their Bog off offers limited to one hit per visit. They cosistently price smaller quantities cheaper than larger fanfared 'bulk' buys. In all I am feeling thouroughly ripped off. I go to Tesco because it is my nearest store, but there are significantly lower numbers of people shopping in their today than there was a year ago. They might have good exposure abroad but they have definately taken their eye off the ball in Britian

cduance 28 Sep 2011 , 4:27pm

that sounds like more of a reason to invest than not to invest esp if they are making an extra £20 per person per shop, just adds to the bottom line.

Brockasaurus 28 Sep 2011 , 5:49pm

@jasonjarvisgbr

I think there are two lines of Berk Hath. The other line has a share price of `only' thousands rather than hundreds of thousands! But then maybe Tony owns bags of the daddy shares. Who knows...

TonyTwoTimes 28 Sep 2011 , 7:33pm

Hi jasonjarvisgbr,

I own the "B" shares. These were bought way back in the days when 30 B = 1A.

They've since been subdivided 50 for 1 after Berkshire bought Burlington Northern Santa Fe railroad, so it's now 1,500B = 1A and they're trading at US$71.45 as I type this

Tony L

jaizan 28 Sep 2011 , 8:53pm

I'm with munchkin on this.

Our local Tesco is losing the plot. They don't keep the shelves stocked properly and always remove just enough staff from the tills to ensure the customer has to wait too long.

Also, the productivity of the checkout staff must be way below some other supermarkets.
For customer service & product availability, Sainsburys, Lidl and even Asda are ahead.

TonyTwoTimes 01 Oct 2011 , 8:13am

Berkshire has started buying back its shares.

Here's an interview with Buffett on CNBC, on Friday 30th Sept 2011.

http://video.cnbc.com/gallery/?video=3000048694

tedfred 01 Oct 2011 , 12:52pm

Errr Excuse me , but

"Where better to start than a share idea from the world's richest investor? Warren Buffett has (apparently) purchased another 34 million shares in Tesco (LSE: TSCO), taking his supermarket stake to 3.6% and seemingly paying a price not dissimilar to that seen when he first bought five(!) years ago."

Now then, where can I buy shares today, which I can then buy in 5 years time at a not too dissimilar price?
Christ, I've been trying to do it wrong for all these years???
Actually guys I am not too convinced that the Prophet of Omaha would actually advocate this investment technique.

If he did you could probably give him a job on your Champion shares Pro team.

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