Share Buffett's Success With Tesco

Published in Investing on 10 May 2012

The world's third-richest man has eyes for only one UK business.

Warren Buffett is a legend of investing, and it's impossible to seriously argue with his success -- a $40 billion personal fortune, plus an investment company that has produced annual gains of close to 20% for well over 40 years, making its shareholders very happy.

So how did he do it? By buying great companies at reasonable prices.

What makes a company great?

There are a number of factors that Buffett looks for in a business before buying, such as a very strong brand identity (usually associated with a dominant market position), together with consistent or growing profit margins and high returns on capital -- all of which can give a company a huge 'economic moat' to protect it from competitors.

On top of that, Buffett looks to buy such companies at a significant discount to their real value -- companies that, for whatever reason, the market doesn't currently love, but whose true value will eventually be reflected in their share price.

As Benjamin Graham, Buffett's early mentor, famously wrote: "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine".

In the end, it's the weight that counts.

Buy what you understand

Buffett also prefers to buy businesses he understands -- companies such as retailers, banks and manufacturers. He's notorious for shunning the tech sector, with the notable exception of IBM (NYSE: IBM.US), whose clear business strategy he really likes and prompted a recent $10 billion investment!

True, this meant Buffett missed out on potentially making lots of money in the dotcom boom of the late 90s. But it also meant he avoided losing lots of money when the bubble burst in March 2000.

And he really likes companies that pay a reliable dividend. Buffett may only be on a modest salary -- spectacularly modest as CEO salaries go -- of $100,000, but last year that was supplemented by about $60 million in dividends from his personal share portfolio.

Buffett's approach to investing has led to him buying into high-quality companies such as Coca-Cola (NYSE: KO.US), American Express (NYSE: AXP.US), Procter & Gamble (NYSE: PG.US) and Wal-Mart (NYSE: WMT.US). Better still, he bought them at what he believed to be bargain prices.

So why Tesco?

Warren Buffett rarely invests outside of the US, so when he chooses to buy into a UK company, it's definitely time to take notice.

As part of Buffett's holdings, Tesco (LSE: TSCO) -- of which the billionaire now owns just over 5% -- is keeping company with some very illustrious stocks. Is the UK supermarket up to that challenge?

Buffet obviously thinks so. Even allowing for the slight fall in yearly sales, Tesco still dominates the British supermarket sector. And the group's international diversification is providing support during the UK economic downturn -- now officially a double-dip recession.

Tesco's group profit is still increasing (up 1.3%), as are its earnings per share (up 7%), cash flow (increased 4%) and its dividend, which was raised to 14.76p per share -- supporting a healthy yield of 4.6% at 322p. In other words, Tesco firmly ticks lots of Buffett's boxes.

Exactly the right time to buy

Despite all of that positive news, the market has fallen out of love with Tesco, notably City super-investor Neil Woodford, who has sold all of his funds' holdings in the company. As result, Tesco's shares are now trading about 20% lower than they were this time year.

Which, if you believe Warren Buffett, may be exactly the right time to buy.

To learn more about Buffett's decision to buy Tesco, this free report -- "The One UK Share That Warren Buffett Loves" -- includes further analysis and reveals the price he paid. 

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012" -- our guide to three favourable industries. This free report will be dispatched immediately to your inbox.

Further investment opportunities:

Both Jon and The Motley Fool own shares in Tesco.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

longpod 10 May 2012 , 6:39pm

What's going on here? I'm sure this article appears virtually every other day!

amsterdamgroove 10 May 2012 , 7:19pm

That's perhaps why there's only 2 comments so far, despite the fact that it contains the words Tesco and Buffet... one wondering why this theme again and this one...

ANuvver 10 May 2012 , 7:28pm

Buffett's Tesco interest is a classic Ben Graham "better dead than alive" value play.

Long-term he's probably right. Doesn't mean I can't wait to pounce sometime over what is shaping up to be a summer of discontent.

jaizan 10 May 2012 , 10:15pm

Tesco don't have an economic moat & I bet Warren Buffet doesn't shop there either.

breelander 11 May 2012 , 1:34am

I don't know if Warren shop there, but Charlie Munger says Tesco has a Fresh & Easy branch in his hometown, Pasadena in California.

MrBearBull888 12 May 2012 , 9:14pm

As an independent thinker just because the Sage of .Omaha has bought or Neik Woodford has sold cuts no ice with me! Buffet has made his fortune and his investing reasons and indeed timing are probably very different from mine!

It's a fact that in the UK TSCO have not had their eye on the ball. The management changes alone show that it is a troubled ship. Notice that to pay their dividend they have to sell freehold property! Nothing new in that as that's par for the course for TSCO. But look at Sainsburys recovering and beginning to motor. MRW Morrisons with it's fresh fish and meat side that knocks spots off TSCO. Then you have the likes of ALDI and LIDL who just can't be beaten for price piling on the pressure on margins.

Whilst I'm sure Buffet will do well from his investment over what time frame will this be.

When Jon do you think he will be able to see a nice gain on his investment one two three or five years? May be longer and as we know Buffet buys a share on the basis that he would be happy to hold if the Market closed for five years. Here in TSCO I agree it is such a share. I hold it.

But is it as good as you say - no it's a hold only for me I can find plenty better places to invest my money. So I'm sure could Buffet if he looked harder.

richjfool 13 May 2012 , 4:12am

There seems to me to be a pre-occupation with Buffet and Woodford in so many of these articles. What about some independent thought!

trmeer 16 Oct 2012 , 1:54pm

Of course Tesco has an economic moat, that's why more people shop there than anywhere else in the UK. The name Tesco is synonymous with good value and a wide range of products.

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