Warren Buffett has had a successful career as a stock picker – and I think I can benefit from his advice. Applying lessons from Buffett, here are two UK shares I would consider buying for my portfolio today.
Recurring profit potential
Buffett likes investing in utilities. Indeed, electricity distribution networks in Yorkshire, Lincolnshire, and North East England all contribute to profits at Buffett’s company, Berkshire Hathaway.
The financial appeal of electricity distribution is simple to understand. Demand is high and will likely remain that way for many years to come. But the cost and logistical challenges of building an electricity distribution network can be very high. That means that many such networks face little or no competition. This lack of competitors can help support a profitable business, although price regulation may keep profits beneath a certain cap. There is also a risk that costs could increase if a distributor needs to change its network to adapt to shifting patterns of electricity consumption. Despite the risks, electricity distribution can be very rewarding.
That is the business model at energy distributor National Grid. The company made profits of £1.6bn after tax last year. It is a consistently generous dividend payer and the shares currently yield 4.5%. I would be happy to tuck them away in my portfolio for their long-term income potential. Warren Buffett does not own National Grid shares, but I think it has many of the characteristics of the sort of business in which he invests.
Long-term brand power
Buffett is a big fan of iconic brands. That is because they help a company achieve pricing power. As customers are loyal to a brand, they are willing to pay for it. That can help a business generate substantial profits.
In his portfolio, Buffett has shares in brand owners such as Coca-Cola and Kraft Heinz. Another company with a worldwide portfolio of premium consumer brands is UK giant Unilever. I reckon owning brands used daily by billions of consumers, including Knorr and Surf, gives Unilever substantial pricing power. That translates into profits, which last year came to around £5.6bn after tax.
Selling at a premium price can be profitable, but those profits may fall if costs increase. That is why price inflation of ingredients is a risk to a company like Unilever. Indeed, the company is grappling with inflationary pressures at the moment. In the long term, I expect cost pressures to ease. The pricing power of Unilever’s brand portfolio should stay strong, though. That is why I would happily add it to my portfolio at the current share price.
Following Warren Buffett
Something else about Warren Buffett’s investment strategy I find noteworthy is that he is a long-term investor, not a trader.
If I bought Unilever and National Grid for my portfolio, I would also be happy to take the long view and hold the shares. Both companies have solid businesses that I expect can stay profitable in the coming years. Putting them in my portfolio today could help me benefit from that profitability.
