Warren Buffett has a legendary record as an investor. While he has bought many companies outright, he is also active in the stock market.
Based on his investment principles, here are two UK stocks I’d consider buying today.
Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!
Warren Buffett on brand pricing power
Buffett has long extolled the financial value of brands.
A company with a strong brand can use it to generate additional profits without adding costs. That is because a brand creates pricing power. Manufacturers can raise prices on products, but customers will still buy them because of their brand loyalty. There are limits, of course, but pricing power can help profitability.
That helps explain Buffett’s love for Coca-Cola shares. It is also why I would consider buying into soft drinks maker AG Barr (LSE: BAG).
A UK pick
Barr is the manufacturer behind the iconic orange Irn-Bru soft drink. Popular in Scotland and the north of England, this product has a loyal fan base. That gives the company pricing power.
But a challenging sales environment during lockdown has taken its toll on the share price. It is up 11% over the past year, but remains far below its 2019 highs. Uncertain demand amid the threat of further lockdowns remains a risk for the company. Revenue last year fell 11% and statutory profit before tax was down 30.5%.
Longer term, the company has been expanding its range to reflect shifting consumer trends. I also see a risk that a decline in the popularity of sugary drinks overall could hurt revenues over time.
I see the current share price as a buying opportunity. The company’s commercial director bought more shares in the past couple of months, which I took as a good sign.
Consumer goods giant
Another company whose brand portfolio delivers the sort of pricing Warren Buffett looks for is Unilever (LSE: ULVR). Indeed, the investor likes the Surf to Marmite producer so much he previously tried to buy it outright.
A wide product portfolio spanning each continent is a classic Buffett play. The investor is a long-term shareholder in Procter & Gamble, which is Unilever’s rival and shares many of its characteristics.
Unilever is highly cash generative, another trait Buffett looks for in an investment. If a company can generate free cash flow, it can fund dividend payouts.
Cash flow can also be used to fund share buybacks. This month the company begins a buyback programme up to €3bn. That could help shareholders, as buying back and cancelling shares reduces the number in circulation. That means that earnings per share increase even if total profit is flat.
One concern I have, though, is why the company is spending so much on its own shares instead of reinvesting it in its own business. It could suggest that the company sees limited room for growth in key markets. That is a risk for Unilever. Brands such as Lifebuoy, which saw a pandemic sales surge, risk falling revenues if demand falls.
Another explanation is that the shares currently offer good value. Up less than 2% over the past year, they seem to have been sidelined in the broader market recovery. I would consider buying more shares in this stock today, applying Warren Buffett principles.