Why did Warren Buffett sell Diageo?

Warren Buffett likes investing in companies that have strong brands. He thinks such brands can give companies a sustainable competitive advantage and pricing power. A famous example of this is his holding in Coca-Cola.

He also used to own shares in Guinness and Johnnie Walker maker Diageo (LSE: DGE). But whereas Buffett has never sold a single share of Coca-Cola, he sold all his Diageo shares. Why did he do that and what lesson can I apply to my own investing?

Diageo as a classic Warren Buffett stock

I see Diageo as a very typical share for Buffett to own. The business is easy to understand. It operates in markets where demand is fairly robust from one year to the next. Its range of assets is impossible for another company to replicate exactly. Premium branding helps the company maintain profit margins, as it can pass cost increases on to consumers in the form of higher prices.

So it is no surprise that Buffett bought Diageo shares back in 1991. He initially spent around $265m on them via Berkshire Hathaway when Diageo’s corporate name was still Guinness and said this: “Our Guinness holding represents Berkshire’s first significant investment in a company domiciled outside the United States. Guinness, however, earns its money in much the same fashion as Coca-Cola”. He later increased his Diageo position and owned over 2% of the company.

Just as I see Diageo as a classic Buffett stock, so it seems did the man himself.

Final orders

He only held the shares for a few years and then sold his entire holding. That in itself is an interesting lesson for me as an investor. He sometimes builds up a stake in a company over many years. But once he decides to sell, he usually sells his entire holding (Apple is a recent notable exception). After all, if he no longer finds the investment case attractive enough to hold some shares, why hold any?

Buffett did not even own the shares for a decade, even though he is usually portrayed as a long-term investor. I am not aware of him articulating a specific reason for the sale. But in general we know that he sells shares when he no longer sees the long-term potential of the business as being attractive enough to keep holding the stake.

Did Buffett make a mistake?

I still think Diageo has the hallmarks of a classic Buffett share pick. But selling it freed up money he could use to buy other shares he felt had more promise.

Over the past five years, for example, Diageo has grown 54%. But Buffett’s biggest holding today, Apple, has grown 348%. So although Diageo has had an attractive return recently, its share price growth has been far outstripped by other Buffett holdings.

Yet from around the time he sold his stake in the mid-1990s to now, Diageo shares have grown 723%. I think that is an attractive return and underlines the long-term appeal of Diageo.  

But over the course of nearly three decades, the investing wizard will have been able to put the money he made selling Diageo shares to good use elsewhere. So I do not think he made a mistake selling them. But I continue to see Diageo as a Buffett-style share. I would consider it for my portfolio.