Warren Buffett is understandably one of the world’s most respected investors. Along with Charlie Munger, he built Berkshire Hathaway into a major US company. Among its top holdings are blue-chip US companies like Apple, Bank of America, Coca-Cola, Kraft Heinz and Moody’s. Buffett has generally avoided the UK, despite the UK market having been cheap since around the time of the Brexit vote.
So what might he buy if he looked at these shores? These FTSE 100 shares are two I like and I think Warren Buffett would too if he was tempted to invest in the UK.
A top Warren Buffett-style share
Given Buffett and Munger’s philosophy of investing in high-quality companies, I think they’d like Unilever (LSE: ULVR). They supported Kraft Heinz’s attempt to acquire it back in 2017. The margin of safety has actually increased since then as the price-to-earnings ratio (P/E) on the fast-moving consumer goods (FCMG) company has fallen in recent years. That makes buying the shares potentially less risky and certainly less expensive.
Given that Berkshire already holds both Coca-Cola and Kraft Heinz among its top holdings, Buffett clearly likes the FMCG sector. I think this is because companies like Unilever have international sales, big markets, strong brands and dependable, high cash flows. They spend heavily on marketing to hold market share and keep customers loyal to their premium brands.
However, if that spend doesn’t create new markets and demand, or encourage loyalty to Unilever’s brands, then sales will slip away. Sales growth has been slow during the pandemic as lockdowns discouraged spending on beauty products in particular. Longer term, that needs to be fixed.
I’m keeping an eye on Unilever but won’t be buying the shares just yet as I want to see the impact of inflation on the business and more top-line growth.
Another Buffett-type stock?
This may surprise some, but I think Buffett could be tempted by UK bank Lloyds (LSE: LLOY) were he to ever invest in Britain. As shown in its top holdings, Berkshire has already chosen to hold US financial stocks such as Bank of America and credit rating agency Moody’s.
I think Lloyds’ focus on the UK and simpler structure, low cost-to-income ratio versus other banks and big share of the UK market would appeal to Buffett. I like Barclays but it’s a more complicated bank given it’s US ops and its investment banking arm, which is more volatile and reliant on staff making the right decisions.
Lloyds as a UK retail bank dealing in mortgages and other financial products for individuals and businesses is easier to understand. Buffett famously doesn’t like to invest in more complicated, hard- to-understand businesses. The Lloyds business model should therefore be more appealing to him.
As, I think, would the valuation. The forward P/E is around seven, and a ratio under 15 is generally seen as being cheap.
When I add the potential for dividend growth post-pandemic and the overall health of the UK housing market, it seems like a share with plenty of upside potential.
Of course, Buffett may look at Lloyds and think it’s overly reliant on the UK for its revenue and profits. As a financial stock it’s also cyclical. But on balance, I think he would like it and I do too. I may add it to my own portfolio.
