Legendary investor Warren Buffett generally applies clear principles when choosing shares to buy. He sets these out in his annual shareholder letters. That makes it easy to acquire knowledge from this talented investor. I often apply these principles to my own share selection.
Here are three UK shares which I would consider buying right now. Each one offers some fit with Warren Buffett style investing principles, in my view.
Strong brands
Unilever is the multinational consumer goods company behind popular brands such as Dove and Surf. Its focus on building distinctive brands helps give it what Warren Buffett calls a business moat.
A business moat is like its namesake around a medieval castle: something that helps make it more defensive. Brands do this by making customers more loyal, which gives a company pricing power. That helps explain why Buffett holds shares in consumer goods companies with strong brands, such as Unilever rival Procter & Gamble. Unilever currently yields 3.6%, though dividends are never guaranteed for any shares.
Risks include any downturn in demand and the impact of heavy expenditure in making its operations more environmentally sustainable.
Drinks companies and Warren Buffett
Another company with a collection of strong brands I would consider for my portfolio is Diageo.
The owner of Johnnie Walker, Baileys, and Guinness has a wide-ranging set of brands across lots of drinks categories. The high profit margins in the alcohol business help demonstrate the pricing power that brands can command. So, as with Unilever, I think Diageo has a strong business moat.
Warren Buffett also likes companies whose customers buy frequently. He has often talked about his holding in Coca-Cola in these terms. As a shareholder, he gets a sliver of profit millions of times each day when someone drinks a bottle.
It typically costs money for a business to recruit a new customer to its franchise. Keeping them and getting them to buy again is usually cheaper. So a business model in which customers buy a product frequently is usually more attractive to me one in which sales are spaced far apart.
Diageo has a strong dividend record, with its dividend growing 5.4% on average over the past decade. The yield currently stands at 2.3%.
One risk is the decline of alcohol consumption, which I have noticed picking up speed among many younger, health-conscious consumers.
Business moat
Warren Buffett’s company Berkshire Hathaway owns energy assets in the UK. Its subsidiary, Northern Powergrid, supplies nearly 4m customers in northeast England.
Power grids are a classic Buffett pick. The high capital cost lends itself to a form of natural monopoly. Also, even if competitors wanted to build another grid, often governments would not allow them.
Pricing is also often subject to regulatory control, potentially limiting profits. But the high barriers to entry in electricity generation and transmission networks make me view this sector as an attractive investment using Warren Buffett principles. FTSE 100 member National Grid runs such a network.
The share is yielding over 5%. Its infrastructure assets provide an attractive business moat, in my view. The immobile nature of assets like transmission networks is a risk for National Grid, like many power companies, as it makes it more captive to political and regulatory risks.