2 Warren Buffett-style stocks to help you make a million

You can become rich investing like Warren Buffett.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Scene depicting the City of London, home of the FTSE 100

Image source: Getty Images.

Warren Buffett is one of the world’s wealthiest people and probably the most respected investor of all time. 

Throughout his career, Buffett has made billions investing in undervalued stocks and unloved industries, but there’s one sector where he’s made more money than anywhere else. 

Cash cow 

Insurance is Buffett’s favourite industry for many reasons, the most important of which is the industry’s profitability. Over the years his Berkshire Hathaway has made billions selling insurance products and then reinvesting the proceeds. The good news is, investors like us can also benefit from insurance’s lucrative traits. 

Beazley (LSE: BEZ) has produced double-digit returns for investors over the past four years. Last year the stock generated a total return of 25.7% following a performance of 2% in 2016, 34.6% in 2015 and 15.4% in 2014. Following these gains, £1,000 invested at the beginning of 2014 would today be worth approximately £1,980. 

It looks as if these lofty returns are set to continue. Today the company announced that, following a profitable year, management “anticipates pre-tax profits for the year ended 31 December 2017 that will be ahead of current market expectations.” Even though 2017 saw some of the worst natural disasters recorded for some time, forcing more than $300bn of losses on the insurance industry, Beazely still expects to make a profit for the year with an estimated combined ratio of 99% (a ratio of less than 100% implies an underwriting profit). 

City analysts had been expecting the company to report earnings per share of 20p on a net profit of $147m for 2017. For 2018, analysts are expecting a net profit of $264m and earnings per share of 34p (at current exchange rates). Based on these forecasts, the shares are trading at a forward P/E of 15.3, which is around the industry average. The shares also offer a dividend yield of 2.8%, and the payout is expected to grow in line with earnings. 

So overall, considering Beazley’s historical performance, and impressive performance this year against a turbulent backdrop, I believe the company could be a great addition to your portfolio. 

Special payouts 

Another insurance stock I’m positive about is Direct Line Insurance (LSE: DLG). This is a personal and small business general insurer, so it operates in a different segment of the market to Beazley, which is less exposed to global catastrophes. 

This means the group’s cash flows are a bit more predictable, supporting larger cash distributions to investors. Since its IPO in 2013, Direct Line has returned 133.3p to investors via regular and special dividends equivalent to around 57% of its 233p IPO price. 

And it looks as if Direct Line will remain a dividend champion for the foreseeable future. Last year the company didn’t make a special payout, but for fiscal 2017, analysts are expecting a total distribution of 29.3p, including the 6.8p already paid. Based on this estimate, the shares are trading with a projected yield of 7.9% and at a forward P/E of 11.8. 

If Direct Line continues to return excess cash to investors and grow earnings, it’s not unrealistic to suggest that the group could produce a total return of 10% or more per annum (7% from income and 3% earnings growth, the average of the last five years) going forward — essentially doubling investors’ money every 7.2 years. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could lithium shares make my Stocks and Shares ISA a goldmine?

Our writer is considering buying lithium shares for his Stocks and Shares ISA. Here, he outlines the decision process he…

Read more »

British Pennies on a Pound Note
Investing Articles

Is now a great time to start buying penny shares?

Are stock markets set for a rebound? If they are, there are plenty of penny shares around that might be…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Can the Lloyds dividend survive a recession?

The Lloyds dividend has been growing strongly. But its history is more alarming. Christopher Ruane explains why he sold his…

Read more »

Electric cars charging in station
Investing Articles

I’m buying this under-the-radar income stock with explosive growth potential

Our author thinks he’s found a winning lithium stock that’s flying under the radar. It’s a steady income stock that…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Are Rolls-Royce shares finally about to climb?

Rolls-Royce shares have been falling again. But I can't see that much has changed, and the full-year outlook still appears…

Read more »

Serious puzzled businessman looking at laptop
Investing Articles

When should I sell my Scottish Mortgage shares?

Buying some Scottish Mortgage shares was an easy decision for me. But I've never been any good at knowing when…

Read more »