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.
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.