Warren Buffett, the ‘Sage of Omaha’, is known to like holding companies forever. But what would he think of Greggs (LSE: GRG)? First of all, he’d have to test the product – Warren Buffett loves drinking Coke, and is a big shareholder in The Coca-Cola Company. But with sales up 12.4% in the recent trading update for the six-week period to 9 November 2019, and company-managed shop like-for-likes up 8.3% in the same period, it’s hard to see him taking a dislike to the nation’s favourite baker.
Buffett likes resilient and simple business models
Warren Buffett is known to like businesses that perform strongly in an economic downturn, and only invests in businesses he understands. He didn’t get involved in the Dotcom bubble and prefers companies he can explain by using a crayon. Greggs’ business is very simple – sell an increasing range of pastries, sandwiches, hot and cold drinks, and do more of this to increase profits.
Greggs is one of the cheapest for products in its sector, and The Coca-Cola Company clearly saw value in acquiring competitor Costa Coffee, as it bought the business from Whitbread for a huge £3.9bn. With its low-cost focus, Greggs is likely to be able to weather any storm better than its competitors.
Buffett likes dividends and returns to shareholders
Warren Buffett likes to invest in companies that are proven and profitable – high-quality businesses that deliver returns to shareholders.
With Greggs’ paltry dividend of 1.75%, the world’s most-loved investor is unlikely to be impressed. But that’s because Greggs is still in a growth phase. The company is reinvesting its profits into growing the business, and growing its profits.
So, whilst Warren Buffett may not like the dividend, he may well like the impressive rate of growth. In a place where many businesses are going bust on the high street, Greggs appears to have the right recipe for success.
Buffett likes competent management
Warren Buffett likes businesses that are ran by capable managers, who Buffett backs on delivering. Given the success of Greggs’ vegan roll, management have shown that they can respond to market change and deliver when it matters.
Another key potential driver for growth has been identified as breakfast by the management, who feel that Greggs can increase their sales during this part of the day.
Warren Buffett is happy to let management do their thing, so long as they have proven themselves. In this instance, I think Warren Buffett would be very impressed.
So – would Warren Buffett invest in Greggs?
It’s hard to give a definitive answer here, but Warren Buffett would definitely be pleased with the stock price – which is up 300% since 2014. He would also likely approve of management, and it’s a simple business he can easily understand. Greggs is also likely to outperform its competitors in a recession. Compounding gains over the long term has been one of Warren Buffett’s biggest advantages, as well as investing in high-quality businesses.
Whilst Greggs has risen a lot over the last few years, I think it could continue to rise some more.
