In 35 years as an investor, I have had one big hero. He is American mega-billionaire Warren Buffett, nicknamed the ‘Oracle of Omaha’. Buffett’s personal fortune exceeds $114bn, despite having donated $45bn to good causes. In 80 years of investing (since the age of 11), Buffett is widely regarded as the world’s best value investor. Here are three quality shares that I don’t own, but believe Warren Buffett would be happy to buy today.
Warren Buffett share #1: Lloyds Banking Group
In his 2008 letter to Berkshire Hathaway shareholders, Warren Buffett wrote, “Price is what you pay; value is what you get”. For me, shares in Lloyds Banking Group (LSE: LLOY) appear cheap today. As I write, Lloyds shares trade at 52.5p, valuing the bank at £37.3bn. That’s a modest price tag for a group with 30m customers, 65,000 staff, and a host of market-leading brands. Also, Lloyds is the UK’s top mortgage lender and a leading provider of credit to businesses and households.
Despite this, Lloyds shares don’t look expensive to me. They trade on eight times earnings and offer an earnings yield of 12.5%. During 2020’s Covid-19 crisis, Lloyds cancelled its dividend, before restoring it in July 2021. Though Lloyds’ dividend yield is just 2.4% a year, analysts expect it to rise. I suspect that such undemanding fundamentals would appeal to Warren Buffett’s value instincts. However, Lloyds could suffer steep loan losses were Covid-19 to make another comeback.
Great business #2: Diageo
Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. In other words, it’s worth paying premium prices for quality stocks. Take this brilliant British business: drinks giant Diageo (LSE: DGE). Diageo sells more than 200 drinks brands in over 190 countries, including gin, whisky, vodka, and rum. Some of its top brands date back four centuries.
As I write, Diageo shares trade at 3,806.18p, valuing the business at £88.3bn. That’s big enough for Warren Buffet to buy a decent stake in. Today, Diageo stock trades on 29.3 times earnings, with an earnings yield of 3.4%. The dividend yield is under 2% a year, making Diageo fairly expensive in FTSE 100 terms. But it has a wide ‘competitive moat’ around its business, which Buffett loves. Then again, if coronavirus surges and spoils the party, then Diageo’s sales could plunge — as happened during earlier lockdowns.
Quality stock #3: Unilever
Warren Buffett also said, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”. Consumer-goods Goliath Unilever (LSE: ULVR) is one great business whose shares slipped in 2021-22. Over the past year, Unilever shares have tumbled from a high of 4,388p on 20 July 2021 to a low of 3,450p on 19 January. As I write, they trade at 3,865.50p, valuing the group at £99.4bn — a market super-heavyweight. As with Diageo, I like Unilever for its veritable warehouse of household brands. One in three people worldwide use Unilever products every day. Wow.
I know Warren Buffett also admires Unilever, because he tried to buy it in January 2017. Today, Unilever trades on 22.2 times earnings, for an earnings yield of 4.5%. The dividend yield of 3.8% a year is broadly in line with the wider FTSE 100. However, Unilever’s sales growth has slowed lately, dropping to 1.9% in 2020. Even so, I’d happily buy and hold this quality company for the long term!
