2 FTSE 100 stocks I’d buy using the Warren Buffett method

Christopher Ruane applies Warren Buffett’s method to pick a couple of UK shares.

| 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.

Warren Buffett is famous for his outstanding track record in investing, By learning his simple approach to assessing shares, investors hope to be able to improve their own success rate in the stock market.

Below I explain one key thing Buffett looks for when assessing companies, and then identify a couple of leading FTSE 100 shares I’d buy using that method.

A moat helps keep protect a company’s business

In olden times, castles had moats to help repel attackers. It took more effort to attack a castle surrounded by a muddy pool of water. That reduced the chance that a building with a moat would be overrun by enemy soldiers.

The same is true for companies. That is why Buffett tries to choose businesses with a commercial “moat” – something which makes it harder for competitors to move into the same business space. For example, Buffett has a big holding in Coca Cola, whose unique formulation provides a protective moat. Similarly, he holds American Express, whose brand and service network is impossible for competitors to replicate.

Special recipes and brand names

Some leading British companies are attractive to me precisely because they have the sort of moat that appeals to Buffett.

One example is Diageo (LSE: DGE). Like Coca Cola, this drinks company has a lot of proprietary drinks recipes, such as its Johnnie Walker whisky blends and Guinness beer brand. These are impossible for competitors to replicate exactly.

In an age of globalised drinks brands, the company’s extensive distribution network further widens its moat. Diageo already sells into bars and restaurants, so the cost of adding in extra drinks brands is minimal. But for a single distillery or brewery with a limited range, getting distribution in new outlets could be cripplingly expensive.

Diageo clearly recognizes the advantage this portfolio strategy gives it. That is why it continues to acquire brands, such as its recent purchase of gin distiller Chase. Its shares have started to pick up again, but I would still buy Diageo for its moat.

Distribution networks

A lesser known company I would also buy for the sort of moat Warren Buffett discusses is the logistics specialist DCC (LSE: DCC). Like Diageo, one element of its business moat is a distribution network. The company operates oil and gas retail networks throughout Europe and North America. In many areas, there is a stable repeat customer base for products like liquid propane gas (LPG).

The costs to entry to set up a competing network are simply too high to be economically viable. While there are concerns about the sustainability of oil markets for cars, I don’t worry about LPG in rural areas and for industrial uses. I expect LPG to continue in use for decades. That moat is one reason why DCC has such strong business results, year after year. DCC may not be as well-known as Diageo, but both companies have raised their dividend every year for more than a quarter of a century.

I find Buffett’s simple principles for successful stock picking helpful partly because they are so easy to understand and apply. Using this method, I’d buy Diageo and DCC today.

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.

chris231 has no position in any of the shares mentioned. 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.

More on Investing Articles

Modern suburban family houses with car on driveway
Investing Articles

Should I snap up Taylor Wimpey shares at £1.30?

With the Taylor Wimpey share price down by almost 30% this year, should I snap up some shares while it's…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m finding shares to buy now – and keep for a decade

Our writer has been looking for shares to buy using an approach that looks both at long-term profit prospects and…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

What’s happening to the Petrofac (PFC) share price?

The Petrofac (LON:PFC) share price has had a seriously erratic year so far. I take a look at the latest…

Read more »

Young black woman in a wheelchair working online from home
Investing Articles

The Aviva share price is flying! Should I buy this 7% yield?

Despite recent gains, Roland Head thinks the Aviva share price could still be too cheap.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Here’s 1 passive income opportunity not to be missed!

This Fool details a passive income opportunity that could bolster his holdings, and the shares trading at cheap levels too.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Legal & General share price is dirt-cheap with a juicy dividend yield!

Jabran Khan takes a closer look at the Legal & General share price which looks like an opportunity to boost…

Read more »

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

If I’d invested £1,000 in this top lithium stock 5 years ago, here’s how much I’d have now!

This lithium stock has gone from strength to strength over the past year. But has it flown too high, or…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A growth stock with a price-to-earnings ratio of just 9.7! Should I buy Yalla?

I'm generally not too keen on investing in dollar-demonated stocks at the moment. But Yalla, with its low price-to-earnings ratio,…

Read more »