LONDON -- Warren Buffett is the world's best investor.
In an investment career spanning decades, he has frequently explained his investment strategy. Using what I know about Buffett, I have tried to identify U.K.-listed companies he might consider buying. Given the funds available to Buffett, he is unlikely to invest outside the FTSE 100 (INDEX: ^FTSE ) . I have added some extra shares I expect Buffett would like if he could buy smaller companies.
Buffett already owns shares in Tesco (LSE: TSCO.L ) . Perhaps he will be buying more. Tesco has a very strong position in its industry, bringing with it substantial buying power. Although recent trading has worried the markets, Buffett is not being put off.
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2. Reckitt Benckiser
One theme common in analysis of Buffett's investment style is that of the "defensive moat" -- a competitive advantage that is hard to replicate.
Companies that own respected brands can enjoy greater economies of scale (because they are selling more) and better terms from retailers (because some brands are must-stock products). The result is large profits and high reliability of future earnings.
Reckitt Benckiser (LSE: RB.L ) owns a portfolio of leading consumer brands including Dettol, Nurofen, and Durex. Its brand assets have helped deliver massive investment returns for shareholders. In 2002, Reckitt Benckiser paid shareholders a dividend of 25.5 pence per share. For 2012, this dividend reached 125 pence per share. In this time, the shares have increased more than threefold.
A smaller alternative might be Portmeirion. This 50 million-pound tableware firm owns brands that date back to the 18th century. Portmeirion has not cut its dividend since it started paying out in 1988.
3. AG Barr
Buffett is a known investor in Coca-Cola. He likes the company's product, strong brand, market position, and pricing power.
The closest share to Coca-Cola in the U.K. is probably AG Barr (LSE: BAG.L ) .
AG Barr is the Glasgow-headquartered manufacturer of Irn-Bru, where it vies with Coca-Cola for top spot among the nation's soft drinkers. The company also owns the fast-growing Rubicon and KA brands.
In the last five years, AG Barr has demonstrated a compound annual earnings growth rate of 11.9% per year. The dividend has increased, on average, 9.8% a year in that time.
With a market capitalization of just 490 million pounds, AG Barr is likely too small for Buffett to invest in. If you are willing to buy shares in even smaller companies, you might take a look at Nichols, the company behind Vimto. Nichols has a market capitalization of 260 million pounds and has increased its shareholder dividend year-on-year since 2004. In the last five years, EPS at Nichols has increased, on average, by 17.1% a year.
4. Smith & Nephew
Smith & Nephew (LSE: SN.L ) is a specialist manufacturer with a market capitalization of 5.8 billion pounds. The company is a world leader in the manufacture of artificial joints for orthopedic health care. In a world with an aging population, Smith & Nephew looks well-placed to cash in.
In the last five years, Smith & Nephew has increased earnings per share at an average rate of 13.3% and shareholder dividends by 10.0% a year on average.
Smith & Nephew is a beneficiary of the strength of its brand. Health-care buyers are likely very reluctant to start using a rival without a comprehensive history of successful deployment. This helps ensure strong profit margins and a high degree of earnings reliability. All this considered, I am slightly surprised to see the shares trading on a forward price-to-earnings ratio of just 13.1 times consensus earnings estimates.
A smaller alternative might be Diploma, which supplies connectors and valves to the energy and aerospace industries. Similar to Smith & Nephew, its products must be reliable as they are so expensive to replace. The result is that Diploma can demand a high price for its products as the risk involved in switching suppliers are high.
5. SAB Miller
SAB Miller is a global brewer with strong brands and strong cash flows and it operates in an industry that continues to enjoy growth. I'm guessing Buffett might also like this stock. I wrote about SABMiller recently in my article "12 Shares That Thrashed The Market."
If you are interested in a smaller alternative, Greene King might be the share for you. The brewer and pub chain has a market capitalization of 1.3 billion pounds. Greene King trades on just 10.1 times consensus forecasts for the coming year and is expected to yield 4.6%.
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