A UK share I think matches the Warren Buffett investment style

Warren Buffett’s investment criteria led me to consider this UK share – here I explain why.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing guru Warren Buffett is now worth an estimated $100bn. No wonder so many investors try to apply his straightforward principles in their own investment decisions.

Lately I have been considering a UK share I think meets a lot of the investment criteria Buffett typically applies to buying shares. Here I share why.

Little known but much loved

The stock in question is Spirax-Sarco Engineering (LSE: SPX).

If you have never heard of it, you are not alone. The specialist engineering firm is not a household name. That is because its main focus is B2B. It supplies engineering products and services to a wide range of customers around the globe. Its main profit driver is steam, but it also has electric thermal solutions and a well-regarded pump business.

Steam hardly sounds like the business of the future! But in fact, all of the company’s offerings have applications in industrial processes such as manufacturing.

Warren Buffett talks about a business having a “moat” – a competitive advantage which makes it difficult for other companies to muscle in on its business area. Spirax-Sarco’s proprietary engineering designs, talented team, and extensive customer relationships form such a moat in my view. If a customer purchased a pump from them before, they would be the obvious choice to maintain or replace it.

Another characteristic that matches Warren Buffett’s investment criteria is the company’s pricing power. Pumps and valves may sound like a commodity market. But, in fact, a lot of Spirax-Sarco revenues come from bespoke solutions designed for a specific customer situation. If a company is running a factory, oil rig, or power station and has to take it offline because of a faulty component, the loss can run into thousands of pounds an hour in some cases. So the sorts of customers Spirax-Sarco targets tend to value quality over price. That gives the company pricing power.

Outstanding dividend record

There aren’t many UK shares that have raised dividends annually for decades.

Spirax-Sarco raised its dividend last week by 7% – a healthy increase. But what impresses me even more is that is just the latest annual raise in an unbroken stretch covering half a century.

Of course, to keep raising dividends in the future, the company will need to maintain and grow earnings. Revenue fell 4% last year and the company only eked out a 1% increase in pre-tax profits. A slowdown in business activity is bad for demand, and any future recession could impact the company negatively.

Even Warren Buffett makes mistakes

Such a share is bound to have its admirers. That pushes the price up. Even after all those dividend increases, Spirax-Sarco is only yielding 1%. That reflects the fact that the share is so popular and heavily bought.

In 2016, Buffett bought a company which made precision engineering components for mission-critical applications. Yet in his insightful letter to shareholders last month, Buffett called the purchase a mistake as he “paid too much”.

Could the current price for Spirax-Sarco be too high? It’s just 8% lower than its all-time peak. If it falls out of fashion or the business starts to struggle, it has a long way to fall down. But its business model gives it a lot of the characteristics of a share I’d choose using Warren Buffett investment criteria.

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 assessed. Consider taking independent financial advice.

christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »