Warren Buffett, possibly the world’s most famous and successful investor, has many words of wisdom, which many of us would do well to follow.
His main game plan is value investing, which involves buying an undervalued company, with a manageable level of debt, a reasonable income through its dividend yield and the potential for future growth, all at a reasonable price. Sound too good to be true? Well, there’s no doubt that finding such gems, is no mean feat, particularly given the current UK economic climate. Nevertheless, I don’t think it’s impossible.
Life insurance
Insurance has been a major part of Buffett’s wealth generation, so perhaps a life insurer is worth considering. FTSE 100 company Phoenix Group (LSE:PHNX) is unusual because it takes on the life insurance policies that other insurers don’t want. In fact, it buys up the old life insurance books of companies that want out of this business. Although at first glance, this may seem a risky play, Phoenix makes the acquisition at a discount and can streamline and merge the books into its own tightly run ship.
Its dividend is 6.4%, the price-to-earnings ratio (P/E) is 10.7 and its share price has risen 29% year to date. Its debt ratio is very high at 97% but cash flow forecasts are good, and I believe Buffett favours companies generating lots of free cash flow. Phoenix also owns the SunLife brand which sells financial products to the over 50s.
Many years ago, Buffett stated that a strong and long-lasting economic ‘moat’ was the most important factor to consider when assessing a potential investment. This means the company should have an edge on competitors. I think Phoenix has this edge through its life insurance acquisitions and the SunLife brand is well established.
Family-owned companies
Buffett likes family-owned companies because these owners are running the company for the good of their family, they’re not simply there to take a pay cheque home. A family-controlled business tends to outperform other investments because management’s ethos is more in line with that of its shareholders.
Hikma pharmaceutical (LSE:HIK) was founded by the Darwazah family in Jordan. Said Darwazah still has a say in how the company is run in his role as Executive Chairman. Hikma is a manufacturer of generic drugs with a strong foothold across the US, Middle East, Europe and North Africa and is present in over 50 countries. It has its own portfolio of branded products along with generic versions of common drugs. Its profits from sales have climbed from $1.4m to over £2m in the past six years.
Its dividend yield is 1.6%, earnings per share are 91p and earnings are predicted to grow at 3% this year and 6% in 2020. The P/E ratio is 20.6, which is high because I think investors are encouraged by the group’s heavy investment in research, development and long-term sustainable growth.
Buffett’s been associated with several drug stocks over the years including Johnson & Johnson, GlaxoSmithKline, Sanofi and more recently Teva Pharmaceutical Industries. Teva, an Israeli generics company, was a controversial acquisition for Berkshire because it was among the most heavily shorted stocks on the market. Hikma’s CEO Siggi Olafsson was a former CEO of Teva.
If I were to invest £10k today, I’d consider both these FTSE 100 companies favourably. Given Buffett’s sage advice has made many investors very wealthy, I think it’s advice worth heeding.
