Warren Buffett's UK Investments

Published in Investing on 12 October 2012

We look at the select group of UK companies that billionaire Buffett has backed.

Warren Buffett, the legendary US investor whose personal fortune is valued at almost $50 billion, doesn't often venture outside his home territory to make investments -- the vast majority of the holdings in his Berkshire Hathaway investment vehicle are US-based businesses.

But Berkshire does have a select few investments in the UK, which we might do well to give consideration to given the Sage of Omaha's habitual backyard bias. So, which UK companies have tempted Buffett out of his US comfort zone?

Supermarkets

Berkshire's biggest UK investment is in Britain's top supermarket Tesco (LSE: TSCO), a shareholding that has been built up over a number of years.

Berkshire first began investing in Tesco in 2006. At that time, under chief executive Sir Terry Leahy, Tesco was already the dominant supermarket in the UK and had ambitious plans for global expansion. Buffett puts great store in the quality of the managers at the companies he invests in, and Sir Terry had quality in spades. A dominant market position is another feature Buffett rates highly, and there was the added attraction that Tesco's international expansion had the potential to be a driver of further growth for many years to come.

In 2010, following the announcement of Sir Terry's retirement and the appointment of his successor, Philip Clarke, Berkshire purchased more shares. Clarke was a Tesco veteran and latterly chief of the company's international operations. Buffett was evidently comfortable with the management continuity of the appointment of a Tesco-through-and-through insider, and perhaps also appreciated Clarke's experience and skills in the international arena.

Berkshire's most recent share purchase was in January this year, following Tesco's first profit warning in over 20 years. Berkshire increased its stake in Tesco from 3.2% to 5.1%. The 408-million shareholding is currently valued at £1.3 billion. In making this latest big purchase, Buffett was following his own oft-quoted advice to be 'greedy when others are fearful'.

Buffett is a long-term investor and it will be some time before we know whether Tesco is another of his great triumphs or one of his rare flops. If you're interested in following his lead on Tesco, you'll be paying 9.5 times this year's forecast earnings at the current share price of 313p. You'll also bag an expected forward dividend yield of 4.6%.

As well as his substantial stake in Tesco, Buffett also has a smaller interest in the UK's number two supermarket, Asda, through his investment in Asda's owner: US retail giant Wal-Mart (NYSE: WMT.US). Asda's 541 stores represent a bit over 5% of Wal-Mart's 10,130-strong global estate.

Big pharma

The other UK public company in which Berkshire is invested is pharmaceutical giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). GSK is Britain's biggest pharma group and the fifth largest on the global stage.

Berkshire's holding in GSK -- via 1.5 million ADRs (American Depositary Receipts) -- dates back to early 2008. The holding is currently valued at $69.5 million (£43 million).

This was another case of being greedy when others are fearful. Berkshire had more faith in GSK than the market, which at the time was fretting about competition from generic drugs and a regulatory clampdown in the US. GSK has since increased its earnings per share by a compound annual growth rate (CAGR) of 4% and its dividend by a CAGR of 7%.

GSK's shares are currently trading at 1,430p, or 12.5 times this year's forecast earnings, and offer a forecast dividend yield of over 5%.

Utilities

Supermarkets and big pharma are traditionally seen as relatively stable and 'defensive' sectors, which means they perform reasonably well in most economic conditions. The same is true of Berkshire's other stake in a UK company.

This company is not listed on the stock exchange but is owned by private US holding company MidAmerican Energy. Berkshire has an 89.5% interest in MidAmerican, which owns a wide variety of utility operations, including Yorkshire Electricity and Northern Electric. Yorkshire Electricity and Northern Electric is the UK's third largest distributor of electricity, and is responsible for almost a quarter of MidAmerican's operating profit.

Unlike Tesco and GSK, there's no way for you to invest in Yorkshire Electricity and Northern Electric -- except in a very diluted form by buying Berkshire Hathaway (NYSE: BRK-A.US) (NYSE: BRK-B.US) shares! But if you want to follow Buffett by backing utilities, you might also want to take notice of the great man's advice to seek "a diversity of earnings streams, which shield [you] from the actions of any single regulatory body".

National Grid (LSE: NG), Centrica (LSE: CNA) and SSE (LSE: SSE) are all subject to the same UK energy regulator: Ofgem. However, National Grid gets around half its revenues from the US, thus significantly reducing its exposure to Ofgem. You could further reduce your exposure by pairing National Grid with a water company -- United Utilities (LSE: UU), Severn Trent (LSE: SVT) or Pennon (LSE: PNN) -- which are regulated by Ofwat. Or, if you want to go the whole hog, you could consider the exchange-traded fund Lyxor ETF MSCI World Utilities (LSE: UTIG).

A closer look at Tesco

I've only scratched the surface of Buffett's investment in Tesco in this article. If you'd like to read the full story, I recommend you download the free and exclusive Motley Fool report -- "One UK Share Warren Buffett Loves".

Make your own mind up about the price Buffett paid for his shares and whether Tesco is a blue-chip bargain. The report is available for a limited time only, but you can have it dispatched to your inbox immediately simply by clicking here.

Are you looking to profit as a long-term investor? “10 Steps To Making A Million In The Market” is the Motley Fool's latest guide to help Britain invest. Better. We urge you to read the report today –while it's still free and available.

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> G A Chester does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco.

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Comments

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.

timeandpatience 12 Oct 2012 , 10:39am

Doesn't Buffett also have a stake in Diageo via Berkshire?

Also, would be interested to know how much Buffett paid per share (in pence) the last time he acquired his stakes if you have the info available.

Thanks
t&p

jackdaww 12 Oct 2012 , 11:22am

the price of glaxo when buffett bought early 2008 was around 1100.

i seem to have picked mine up for around 1150 - quite close to buffetts.

smug mode.

johnnygibber 12 Oct 2012 , 12:36pm

You can buy preference shares direct in Northern electric (yielding around 5.5% at mo).

NTEA is the ticker.

Should be safe if the big Buffett has a few.

Cheers
JG

koochak 12 Oct 2012 , 1:18pm

Today's assignment: we should all buy Berkshire Hathaway, sit back and avoid all the hassle - Discuss.

amsterdamgroove 12 Oct 2012 , 2:36pm

>> Today's assignment: we should all buy Berkshire Hathaway, sit back and avoid all the hassle - Discuss.

Good one, koochak!

DVB99 12 Oct 2012 , 3:19pm

fine if you have loads of money to invest.
how many shares would you like @ $134,000 per share!
i would buy 0.2 of a share if i could.

koochak 12 Oct 2012 , 3:29pm

Buy (non-voting) BRK.B shares for $90 ?

Graham01 12 Oct 2012 , 3:42pm

DVB99, you don't need to buy the A shares, you could buy a few B shares. B shares are 1/1500th of of an A share.

I bought a small number just over two years ago, maybe a bit of a fan buy, but they stand 15% up today and I'm happy to hold.

theRealGrinch 12 Oct 2012 , 5:52pm

He must have a stake in Motley Fool (UK) :-)

jaizan 12 Oct 2012 , 8:28pm

Due to outstanding management, the long term track record of this company has been terrific. That would normally justify an investment.

However, Warren Buffet 82 is & Charlie Munger is 88.
The advantage of outstanding management is unlikely to have a long term future.

apprenticeDRL 13 Oct 2012 , 5:25pm

Interesting. I personally chose Centrica for my Utilities exposure as they seemed to offer the best value, and current share price moves have so far borne this out (touch wood).

goodlifer 16 Oct 2012 , 12:56am

jaizan
"Due to outstanding management, the long term track record of thi
However, Warren Buffet id 82."

That gives him another 10-15 years.

Obviously he doesn't need the money, he just loves the game.
And he's getting quite good at it.

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