Warren Buffett is one of the world’s wealthiest people, and he is also considered to be one of the best investors of all time. He didn’t get to where he is today gambling on small-cap mining stocks or buying ultra-safe bonds.
For the past five decades, his investment strategy has revolved around buying high-quality companies at attractive prices and never selling.
Buffett likes to invest in businesses with strong brands and attractive profit margins, companies like Unilever (LSE: ULVR). In fact, I think Buffett would be interested in buying Unilever if it were based in the United States (he rarely invests outside the country).
Unilever owns some of the most recognisable consumer brands in the world, such as Dove soaps and Magnum ice creams. It’s aiming to grow sales by 3-4% per annum over the long term through a combination of organic growth and bolt-on acquisitions. The company also has a significant presence in emerging markets, such as India, where it’s been operating for decades.
These fast-growing economies account for around half of sales, and while sales in developed markets are stagnating, emerging market growth is picking up the slack. During the second quarter of 2019, overall underlying group sales grew 3.3% with emerging market underlying sales up 6.2%.
But Buffett’s not just after growth. He looks for profitability as well. And when it comes to earnings strength, Unilever stands out. The company’s return on capital employed — a measure of profitability for every £1 invested in the enterprise — has averaged around 25% for the past six years, putting the business in the top 10% of the most profitable stocks traded in London.
Unfortunately, this kind of quality doesn’t come cheap. The stock is currently trading at a forward P/E of 21.5. Nevertheless, Buffett is usually happy to pay a premium price for a quality business. I think this is one of those occasions where it’s worth paying up to invest in Unilever’s growth.
Another high-quality stock I think Buffett might buy is Diageo (LSE: DGE). Like Unilever, Diageo owns a portfolio of billion-dollar, high-profile drinks brands including Guinness, Smirnoff and Johnnie Walker. Over the past six years, sales have grown at a compound annual rate of just under 5% and net profit has increased at a rate of 7% per annum, thanks to cost increases and efficiency savings.
Diageo isn’t as profitable as Unilever — return on capital employed is just 17% — but the company is still up there as one of the most efficient businesses traded in London. It is in the top 20%.
At the time of writing, shares in the global giant are dealing at a forward P/E of 22.9. Analysts are expecting the group to report earnings growth of 12% this year, followed by an expansion of 8% for 2021. On top of this, the stock supports a dividend yield of 2.3%. Over the past six years, the distribution to investors has grown at an inflation-busting 5.8% per annum.
As long as the entire world doesn’t decide to become teetotal overnight, I reckon this trend of earnings and dividend growth can continue for many years to come.
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Rupert Hargreaves owns shares in Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. 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.