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Warren Buffett's U.K. Investments

By G. A. Chester – Updated Apr 7, 2017 at 11:24AM

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We look at the select group of U.K. companies that billionaire Buffett has backed.

LONDON -- Warren Buffett, the legendary U.S. investor whose personal fortune is valued at almost $50 billion, doesn't often venture outside his home territory to make investments -- the vast majority of the holdings in his Berkshire Hathaway investment vehicle are U.S.-based businesses.

But Berkshire does have a select few investments in the U.K. that we might do well to give consideration to given the Sage of Omaha's habitual backyard bias. So, which U.K. companies have tempted Buffett out of his U.S. comfort zone?

Berkshire's biggest U.K. investment is in Britain's top supermarket Tesco (LSE: TSCO.L), a shareholding that has been built up over a number of years.

Berkshire first began investing in Tesco in 2006. At that time, under chief executive Sir Terry Leahy, Tesco was already the dominant supermarket in the U.K. and had ambitious plans for global expansion. Buffett puts great store in the quality of the managers at the companies he invests in, and Sir Terry had quality in spades. A dominant market position is another feature Buffett rates highly, and there was the added attraction that Tesco's international expansion had the potential to be a driver of further growth for many years to come.

In 2010, following the announcement of Sir Terry's retirement and the appointment of his successor, Philip Clarke, Berkshire purchased more shares. Clarke was a Tesco veteran and latterly chief of the company's international operations. Buffett was evidently comfortable with the management continuity of the appointment of a Tesco-through-and-through insider, and perhaps also appreciated Clarke's experience and skills in the international arena.

Berkshire's most recent share purchase was in January this year, following Tesco's first profit warning in over 20 years. Berkshire increased its stake in Tesco from 3.2% to 5.1%. The 408-million shareholding is currently valued at 1.3 billion pounds. In making this latest big purchase, Buffett was following his own oft-quoted advice to be "greedy when others are fearful."

Buffett is a long-term investor, and it will be some time before we know whether Tesco is another of his great triumphs or one of his rare flops. If you're interested in following his lead on Tesco, you'll be paying 9.5 times this year's forecast earnings at the current share price of 313 pence. You'll also bag an expected forward dividend yield of 4.6%.

As well as his substantial stake in Tesco, Buffett also has a smaller interest in the U.K.'s No. 2 supermarket, Asda, through his investment in Asda's owner: U.S. retail giant Wal-Mart (NYSE: WMT). Asda's 541 stores represent a bit over 5% of Wal-Mart's 10,130-strong global estate.

Big pharma
The other U.K. public company in which Berkshire is invested is pharmaceutical giant GlaxoSmithKline (LSE: GSK.L) (NYSE: GSK). GSK is Britain's biggest pharma group and the fifth largest on the global stage.

Berkshire's holding in GSK -- via 1.5 million ADRs (American Depositary Receipts) -- dates back to early 2008. The holding is currently valued at $69.5 million (43 million pounds).

This was another case of being greedy when others are fearful. Berkshire had more faith in GSK than the market, which at the time was fretting about competition from generic drugs and a regulatory clampdown in the U.S. GSK has since increased its earnings per share by a compound annual growth rate (CAGR) of 4% and its dividend by a CAGR of 7%.

GSK's shares are currently trading at 1,430 pence, or 12.5 times this year's forecast earnings, and offer a forecast dividend yield of over 5%.

Supermarkets and big pharma are traditionally seen as relatively stable and "defensive" sectors, which means they perform reasonably well in most economic conditions. The same is true of Berkshire's other stake in a U.K. company.

This company is not listed on the stock exchange but is owned by private U.S. holding company MidAmerican Energy. Berkshire has an 89.5% interest in MidAmerican, which owns a wide variety of utility operations, including Yorkshire Electricity and Northern Electric. Yorkshire Electricity and Northern Electric is the U.K.'s third largest distributor of electricity, and is responsible for almost a quarter of MidAmerican's operating profit.

Unlike Tesco and GSK, there's no way for you to invest in Yorkshire Electricity and Northern Electric -- except in a very diluted form by buying Berkshire Hathaway (NYSE: BRK-A) shares! But if you want to follow Buffett by backing utilities, you might also want to take notice of the great man's advice to seek "a diversity of earnings streams, which shield [you] from the actions of any single regulatory body."

National Grid, Centrica, and SSE are all subject to the same U.K. energy regulator: Ofgem. However, National Grid gets around half its revenues from the U.S., thus significantly reducing its exposure to Ofgem. You could further reduce your exposure by pairing National Grid with a water company -- United Utilities, Severn Trent, or Pennon -- which are regulated by Ofwat. Or, if you want to go the whole hog, you could consider the exchange-traded fund Lyxor ETF MSCI World Utilities.

A closer look at Tesco
I've only scratched the surface of Buffett's investment in Tesco in this article. If you'd like to read the full story, I recommend you download the free and exclusive Motley Fool report -- "One U.K. Share Warren Buffett Loves."

Make your own mind up about the price Buffett paid for his shares and whether Tesco is a blue-chip bargain. The report is available for a limited time only, but you can have it dispatched to your inbox immediately simply by clicking here.

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G A Chester does not own any shares mentioned in this article. The Motley Fool owns shares of Tesco and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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