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Should You Buy Warren Buffett’s British Rejects Tesco PLC, GlaxoSmithKline plc And Diageo plc?

Renowned investor Warren Buffett doesn’t venture outside his US backyard that often. But Tesco (LSE: TSCO), GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Diageo (LSE: DGE) (NYSE: DEO.US) are three FTSE 100 companies that share the distinction of having once had a place in the multi-billionaire’s Berkshire Hathaway investment portfolio.

The three British blue chips are no longer there, having all be sold at one time or another by the man whose ideal holding period is “forever”. The question is: do Tesco, Glaxo and Diageo still pass muster as quality businesses, and could now be a good time to buy.

Diageo

Buffett was over 60 years old before Berkshire made its first significant investment in a company domiciled outside the US. The year was 1991 and the company was Guinness, which went on to merge with Grand Metropolitan to form Diageo in 1997. Berkshire’s holding was below the disclosable threshold of 3%, but he reportedly sold the stock in 1994, following a period of under-performance.

Buffett had compared Guinness with Coca-Cola: “in the sense of where they earn their profits — continent-by-continent — Coca-Cola and Guinness display strong similarities”. Today, Diageo is a more international business with a more powerful stable of brands than ever before.

The company’s share price has quadrupled over the past two decades to around £18, but the valuation is unchanged: Diageo yields 2.9% today, just as it did 20 years ago. It’s difficult to imagine the world won’t be consuming even greater quantities of Guinness, Johnnie Walker, Baileys and suchlike in the next 20 years. So, I think Diageo can continue to deliver long-term value for shareholders.

GlaxoSmithKline

Berkshire Hathaway bought shares in the Footsie’s biggest pharmaceuticals firm in 2007. Glaxo’s shares had fallen during the year to under £13, hit by safety concerns about the company’s diabetes pill Avandia, as well as delays in getting some new drugs approved.

Berkshire exited its position in Glaxo in the second half of 2013 when the shares were trading at multi-year highs of comfortably above £16 — a level not seen since 2002. Glaxo has under-performed since Berkshire dumped its holding, and the shares are currently trading below £15.

Most big pharma companies have been struggling for growth during a period of patent expiries across the sector and competition from generics. However, Glaxo is expected to start increasing earnings again in 2016 after what will have been four years of declines. The company is pegging its dividend at 80p a year through to 2017, so investors today will be getting a 5.4% annual yield, while waiting for earnings to start motoring again. That looks a reasonable deal to me.

Tesco

Buffett first bought Tesco shares in 2006. After the company’s infamous profit warning in early 2012, Buffett piled in, taking Berkshire’s holding in the company from 3.2% to 5.1%.

However, in 2013, Buffett sold about a quarter of the shares, and continued to sell throughout 2014 as “Tesco’s problems worsened by the month … You see a cockroach in your kitchen; as the days go by, you meet his relatives”. By the time Buffett sold out completely, Berkshire had racked up an after-tax loss on the investment of $444m. Buffett said: “I made a big mistake with this investment by dawdling”.

Still, Buffett appears to continue to rate Tesco’s position as “the leading food retailer in the UK and an important grocer in other countries as well”. The issue for Buffett when he began selling the shares in 2013 was that he had “soured somewhat on the company’s then-management”.

It is too early to really judge Tesco’s new management — though Buffett has said “we wish them well” — and with the shares having recovered from last year’s lows to comfortably above £2, I’d say the price is well up with events at this stage.

Buffett may have backed out of Britain, but I can tell you that two of the companies I've written about today belong to an elite group of five blue chips identified by the Motley Fool's experts as FTSE 100 powerhouses.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.