LONDON -- Warren Buffett is one of the world's smartest-ever investors. Berkshire Hathaway -- the ailing textile company that Buffet bought into in the mid-1960s, and turned into a world-beating investment vehicle -- has delivered returns of over 20% per annum since 1965, and turned Buffett himself into the world's third-wealthiest person.
Given all this, many investors make the mistake of thinking that Buffett must use high-tech financial models and advanced discounted cash flow techniques to select the businesses that he buys into.
In fact, nothing could be further from the truth.
As Charlie Munger, Buffett's partner, once put it at an investors' meeting: "Warren often talks about these discounted cash flows, but I've never seen him do one."
"It's true," replied Buffett, acknowledging that to experienced eyes, a good share just looked like a good share. "It's sort of automatic... It ought to just kind of scream at you that you've got this huge margin of safety."
So how does Buffett tell if a share would be a good pick? While a look at the financials certainly plays a part, it's a part that comes only at the end of multi-stage process -- a process that includes an early evaluation of that famous "moat" with which he's often associated.
As the man himself puts it: "In business, I look for economic castles protected by unbreachable moats."
In short, Buffett is looking for:
- A business that he understands
- Favorable long-term economics
- An able and trustworthy management
- A sensible price tag
So would Hargreaves Lansdown (LSE: HL.L ) pass the test? The company reported its full-year results today, so I thought I'd take a look.
Hargreaves Lansdown was set up in 1981 by co-founders Peter Hargreaves and Stephen Lansdown -- who between them still own over 50% of the business.
The company caters to individuals who want excellent service, yet are happy to make their own investment decisions, a growing trend. Key products are its "Vantage"-branded ISAs, SIPPs, and fund investment accounts. Better still, the hefty investments in these platforms have long-since been made: New customers add little by way of additional cost, and a lot by way of additional profit.
Based in Bristol, Hargreaves Lansdown prides itself on its approach to customer service, and a May 2011 client satisfaction survey showed that 96% of the company's clients rated the service good, very good, or excellent. Irrelevant? Not to Buffett, who sees loyal customers as part of that famous moat.
And in 30 years, Hargreaves Lansdown has gone from small beginnings in a spare bedroom to a publicly quoted company that is a member of the FTSE 100 (UKX) index. As at 31 March 2012, it held 26 billion pounds of assets under administration on behalf of over 413,000 private investors. The market cap is 2.9 billion pounds.
Year ending June 30, 2007
Year ending June 30, 2008
Year ending June 30, 2009
Year ending June 30, 2010
Year ending June 30, 2011
|Earnings per share||6.5p||9.1p||11.3p||14.0p||20.3p|
|Dividend per share||3.0p||5.5p||7.3p||8.6p||12.9p|
Would Buffett buy?
Over the last five years, Hargreaves Lansdown has grown revenues by 20% a year, and pre-tax profit by 50% a year -- no mean feat in a recession. Over the same period, earnings per share have grown by 33% a year, and dividends by 44% a year. "Special" dividends, declared on a discretionary basis, boost investors' returns still further.
Throw in the company's moat -- its market dominance, "Vantage" platform and unparalleled reputation for customer service -- and its long-serving co-founders, and the mix begins to look compelling.
Granted, Stephen Lansdown, who has taken something of a back seat in recent years, has today announced his retirement from the board. But successors to he and Hargreaves are already in place, and Buffett and Munger, who in their eighties, are doubtless sanguine about managers and shareholders in their sixties. And the impact of the Retail Distribution Review, and its moratorium on "trail" commission earned from funds? Again, transitional arrangements are in place.
Throw in today's results -- another 20%+ increase in pre-tax profits on the back of revenues boosted by 15% -- and the picture is clear.
Would Buffett buy Hargreaves Lansdown, whose shares are changing hands at 630 pence today? Despite a price-to-earnings (P/E) ratio that, at 21.9, is almost twice the market average, the answer, I believe, is yes: Good businesses aren't always cheap, and it's better to get a good business than a cheap business.
Follow the money
But will Buffett buy Hargreaves Lansdown? No one knows. What we do know, though, is that although he rarely ventures outside the United States for money-earning opportunities, one U.K.-listed share has caught his eye.
Its name? Simply download this free special report from The Motley Fool -- "The One UK Share Warren Buffett Loves" -- to find out. Inside, you'll discover just why Buffett has invested over 1 billion pounds in this business, of which he now owns over 5%, and why you could consider taking a stake, too.
Underperforming the FTSE by 20% over the past few months, the company trades on a prospective P/E of 9.3 -- well below the FTSE 100 average -- and offers a tasty 4.8% forecast yield. As I say, the report is free, and can be in your inbox in seconds.
Are you looking to profit as a long-term investor? "10 Steps to Making a Million in the Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.
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Malcolm does not have an interest in any of the shares named. The Motley Fool owns shares in Hargreaves Lansdown.