I’ve learnt a lot over the years by studying the lessons freely given by legendary investor Warren Buffett. Using Buffett’s investing style, there’s a share I would consider adding to my portfolio today and holding for years.
A business with a strong moat
One of the things that attracts me about the UK share in question is its strong ‘moat’. That is how Buffett refers to a company’s competitive advantage. It matters because it gives a company pricing power, which allows it to keep profits strong, even in the face of cost inflation.
The share I am thinking of is consumer goods maker Unilever (LSE: ULVR), the manufacturer of Marmite, Dove, and Surf. Its portfolio of iconic premium brands is well-known and helps build customer loyalty. Last year, Unilever reported post-tax profits north of €6bn.
Cash flow potential
In addition to moats, Buffett likes companies to have strong free cash flow. That is because companies with lots of cash coming in can pay dividends, instead of needing it to invest in developing the business. That is true at Unilever. Given the current Unilever share price, the company’s shares have a dividend yield of 3.8%. The company pays dividends on a quarterly basis, which can provide shareholders with a regular passive income stream. Of course, dividends are never guaranteed.
With its focus on everyday goods, Unilever cash flows should be able to stay strong even amid economic downturns. Over two billion consumers use the company’s wares each day. That keeps demand for replenishment high, driving sales. It also reflects the broad global reach of the firm’s operations. That is a helpful mitigation against uneven levels of economic development in different regions. Unilever is exposed to the growth potential of developing markets, but it has some insulation from recession thanks to its strong position in wealthy markets.
The Unilever share price
We know Unilever meets the Warren Buffett investing criteria — because he tried to buy the whole company back in 2017. That bid valued Unilever at £40 a share.
Today, the Unilever share price is lower than that. In other words, I can buy a share in a company Warren Buffett wanted to buy outright even cheaper than he offered to pay.
Warren Buffett investing and value
But if the company is so attractive, why hasn’t Buffett been loading up on its shares even after the failed bid? We know he is happy to own partial stakes in listed companies. But Unilever doesn’t feature among the larger holdings published in the annual shareholder letter of Warren Buffett’s holding company, Berkshire Hathaway.
That could be because Buffett reckoned he could improve profit margins owning the company outright in a way he couldn’t simply by being a shareholder. But it could also reflect the fact that Buffett recognises some of the risks facing Unilever. For example, rampant cost inflation threatens to eat into profits. A recession could lead to flagging sales in some markets. Meanwhile, younger customers seem less enthusiastic about consumer packaged goods than older generations. That could hurt revenues and profits.
My next move
Despite the risks, Unilever looks attractive to me at its current price. I reckon it has the characteristics that match the Warren Buffett investing method. I’d consider adding it to my portfolio today.