5 Shares Warren Buffett Might Buy Today

Published in Investing on 16 July 2012

A look at Buffett's buys to see what UK shares he may consider.

Warren Buffett is the world's best investor.

In an investment career spanning decades, Mr Buffett has frequently explained his investment strategy.

Using what I know about Buffett, I have tried to identify the UK-listed companies he might consider buying. Given the funds available to Mr Buffett, he is unlikely to invest outside the FTSE 100 (UKX). I have added some extra shares I expect Buffett would like if he could buy smaller companies.

1) Tesco

Buffett already owns shares in Tesco (LSE: TSCO). Perhaps he will be buying more. Tesco has a very strong position in its industry, bringing with it substantial buying power. Although recent trading has worried the markets, Buffett is not being put off.

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2) Reckitt Benckiser

One theme common in analysis of Warren Buffett's investment style is that of the 'defensive moat' -- a competitive advantage that is hard to replicate.

Companies that own respected brands can enjoy greater economies of scale (because they are selling more) and better terms from retailers (because some brands are must-stock products). The result is large profits and high reliability of future earnings.

Reckitt Benckiser (LSE: RB) owns a portfolio of leading consumer brands. These include Dettol, Nurofen and Durex. The company's brand assets have helped deliver massive investment returns for shareholders. In 2002, Reckitt Benckiser paid shareholders a dividend of 25.5p per share. For 2012, this dividend reached 125p per share. In this time, the shares have increased more than threefold.

A smaller alternative might be Portmeirion (LSE: PMP). This £50m tableware firm owns brands that date back to the 18th century. Portmeirion has not cut its dividend since it started paying out in 1988.

3) AG Barr

Buffett is a known investor in Coca-Cola (NYSE:KO.US). He likes the company's product, its strong brand, market position and pricing power.

The closest share to Coca-Cola in the UK is probably AG Barr (LSE: BAG).

AG Barr is the Glasgow-headquartered manufacturer of Irn-Bru, where it vies with Coca-Cola for top spot among the nation's soft drinkers. The company also owns the fast-growing Rubicon and KA brands.

In the last five years, AG Barr has demonstrated compound annual earnings growth rate of 11.9% per year. The dividend has similarly increased, on average, 9.8% a year in that time.

With a market capitalisation of just £490m, AG Barr is likely too small for Buffett to invest in. If you are willing to buy shares in even smaller companies, you might take a look at Nichols (LSE: NICL). This is the company behind Vimto. Nichols has a market capitalisation of £260m. The company has increased its shareholder dividend year-on-year since 2004. In the last five years, eps at Nichols has increased, on average, by 17.1% a year.

4) Smith & Nephew

Smith & Nephew (LSE: SN) is a specialist manufacturer with a market capitalisation of £5.8bn. The company is a world leader in the manufacturer of artificial joints for orthopaedic healthcare. In a world with an ageing population, Smith & Nephew looks well placed to cash in.

In the last five years, Smith & Nephew has increased earnings per share at an average rate of 13.3% and shareholder dividends by 10.0% a year on average.

Smith & Nephew is a beneficiary of the strength of its brand. Healthcare buyers are likely very reluctant to start using a rival without a comprehensive history of successful deployment. This helps ensure strong profit margins and a high degree of earnings reliability. All this considered, I am slightly surprised to see the shares trading on a forward price-to-earnings (P/E) ratio of just 13.1 times consensus earnings estimates.

A smaller alternative might be Diploma (LSE: DIPL). Diploma supplies connectors and valves to the energy and aerospace industries. Similar to Smith & Nephew, its products must be reliable as they are so expensive to replace. The result is Diploma can demand a high price for its products as the risk involved in switching supplier are high.

5) SAB Miller

SAB Miller (LSE: SAB) is a global brewer with strong brands, strong cash flows and operates in an industry that continues to enjoy growth. I'm guessing Warren Buffett might also like this stock.

I wrote about SABMiller recently in my article 12 Shares That Thrashed The Market.

If you are interested in a smaller alternative, Greene King (LSE: GNK) might be the share for you. The brewer and pub chain has a market capitalisation of £1.3bn. Greene King trades on just 10.1 times consensus forecasts for the coming year and is expected to yield 4.6%.

Where is the UK's leading dividend stock-picker investing today? The identities of Neil Woodford's favourite blue chips are revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".

Further investment opportunities:

> David does not own shares in any of the above companies. The Motley Fool owns shares in Tesco and Smith & Nephew.

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Comments

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F958B 16 Jul 2012 , 3:13pm

I'll take Tesco, but not the others.

Reckitt - like Tesco - are now in a no-growth period - except that Reckitt shares continue to trade at a huge premium to the market when they should really be marked-down by 20% for the lack of growth for the forseeable future.

Smith and Nephew have a long and distinguished history of destroying shareholders' cash; they bought back shares aggressively at high prices prior to the 2008 crash, and still they retain a lot of earnings for only modest growth. Hard cash into shareholders pockets in the form of dividends has been sparse.

SAB and AGBarr both trade at very high premium prices to the market. The shares must continue blistering growth or will be at risk of a much-worse-than-Tesco-style de-rating if growth stalls. The market marked-down Tesco from 11x P/E to 9x P/E merely for a stalling in growth. With SAB, AGBarr (and Reckitt) all trading in the high-P/E's, their falls from grace could be very substantial if they do not continue to deliver high growth.

johnlatkins 16 Jul 2012 , 3:40pm

Greene King have much better products than SabMiller. Hopefully the quality and value will be seen in the share price going forward.

theRealGrinch 16 Jul 2012 , 3:49pm

Im yawning my head off at buffet stories. Im not in a club of one

jackdaww 16 Jul 2012 , 4:51pm

tesco yes - and morrisons and sainsburys.

greene king has too much debt for me.

prefer unilever to reckitt but not at current price.

smith and nephew are not cheap and pay mediocre dividend.

sab miller , ag barr and nichols are too dear

QuantumDealer 16 Jul 2012 , 5:19pm

Agree with Jackdaww here... Buffett wouldn't touch the other 4 stocks based on valuations.

alarmbells 16 Jul 2012 , 5:36pm

I'm with the Grinch. Quit the faux Buffet rubbish and lets have some genuine INSIGHT from the guys!

If you must Bufetise everything for goodness sake lets have a bit of company financial analysis.

alarmbells 16 Jul 2012 , 5:36pm

I'm with the Grinch. Quit the faux Buffet rubbish and lets have some genuine INSIGHT from the guys!

If you must Bufetise everything for goodness sake lets have a bit of company financial analysis.

Dylantherabbit 16 Jul 2012 , 6:07pm

I would like to pick up shares in AG Barr but the current price is to high, the p/e is over 18. Reckitt is expensive but I am happy to hold, but would not buy at these levels, the yield is to low and the P/E over 14.

I have more Tesco than I know what to do with and would happily buy more at these prices, but they are over 5% of my portfolio so thats enough for me, I may add Sainsburys as at over 5% yield they look good value.

Thats the thing with Buffet, he finds the right company and goes in big and then he holds.

TonyTwoTimes 16 Jul 2012 , 6:22pm

The problem with comparing Greene King with SABMiller is that is a British regional brewer with a lot of property and pub retail interests which is operating in a stagnant economy in a sector (pubs) that’s under serious pressure because of government policy.

In contrast SABMiller makes almost three-quarters of its sales outside Europe and North America and most of these come from the faster growing emerging market nations. It’s no wonder that SAB on a much higher P/E ratio than Greene King.

When it comes to the UK based multinationals, surely their comparator group is the multinational competition (e.g. Colgate-Palmolive for Unilever, Anheuser Busch InBev for SABMiller) which are generally on similar or higher P/E ratios.

I’ve been consistently told that Diageo was expensive ever since its share price began with a “3”

F958B 16 Jul 2012 , 6:45pm

TTT

Once the early 1990's recession began to really bite, the brewer "Bass" was sent by Mr.Market to the slaughterhouse after a profits warning; with a short sharp drop in the shares from £12 to £9 as the market de-rated its growth prospects.

With Europe in recession, and with China and the US sliding towards recession (and the return of the US fiscal cliff debate in a few months time as we again come upon the can which was kicked down the road a year ago) unless we soon see some very aggressive stimulus, then I have to wonder whether there will be no growth and maybe even some household cutbacks in the BRICS nations.
This could result in highly-rated multinationals (DGE, SAB, RB, ULVR) also suffering a considerable growth slowdown and subsequently following Tesco into the doghouse.

F958B 16 Jul 2012 , 7:01pm

Also when looking at the very-highly-rated brewers, let me set the scene before getting to the main point........

Although we all hope that we can offload shares in a dying company before anyone else notices, someone will always be holding a company when its value drops to zero.
Therefore, in general terms, the only gains made from a business (if held from birth to death), will be the profits which it has paid out to its owners - generally in the form of dividends.

If I run some numbers, projecting the dividend payout a decade into the future, I get the following yield in year ten, after ten years of growth at the rates listed below:

Diageo @ 9% annual growth = 6% dividend yield.
Centrica @ 5% annual growth = 8% dividend yield.

SABMiller @ 10% annual growth = 6% dividend yield
Sainsbury @ 4% annual growth = 8% dividend yield.

Not that I am necessarily recommending a purchase of SBRY or CNA, but they are chosen to make the point that I reckon I'll have a higher payout from my investment in ten years time, and will have received higher payouts along the way which could have been used to buy even more shares for even greater payouts due to compounding.

So I don't see much to justify buying the brewers, apart from speculators hoping to sell the shares to a greater fool for an ever-higher price.
In the meantime, the cold hard cash of dividends - the nearest thing to certainty in the markets - will have been pumping into my bank account from less glamorous investments; I would not be needing to depend on the fickle movements of share prices in order to make a decent return.


nnnnineteen 17 Jul 2012 , 1:23pm

He "might" consider those 5. He "might" consider a totally different 5. Who knows apart from WB?

BarneyCowshed 17 Jul 2012 , 4:59pm

I'm with the Grinch.

A Buffet free day would be nice.

MrBearBull888 17 Jul 2012 , 5:54pm

Im with Barney Cowshed

A Buffet free day would be great. I think TMF hides behide Buffet to get attention to articles. F958B makes some really great points. I have been unloading RB for a while but have kept ULVR.

Satyamshivum 18 Jul 2012 , 5:38am

I am also fed up about WB's buys he has millions I have pennies

ChancieGardener 18 Jul 2012 , 10:24am

What next.... a look to see what undercrackers WB wears? Yawn!

atilliator 18 Jul 2012 , 1:54pm

"SAB Miller (LSE: SAB) is a global brewer with strong brands, strong cash flows and operates in an industry that continues to enjoy growth. I'm guessing Warren Buffett might also like this stock."

Don't think so: He doesn't drink.

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