Forever Investor

There was an an interesting post by Total Return Investor a few months ago in which he had a go at cloning Neil Woodford’s portfolio with US-based companies. That started me thinking about whether British investors could do something similar to create their own mini-Berkshire Hathaway.

Obviously valuation is always key when buying shares and I am not suggesting that these companies are priced attractively today, rather this is just a fantasy portfolio list of the sort of companies I think Buffett might like if they were priced within striking distance of his idea of fair value. Note that we do have a few clues to work on because he has made the odd transatlantic sally over the decades (albeit not always with notable success, it has to be said.)

Consumer Goods

Along with financials, this has been the main playground for Buffett over the years, and the FTSE is replete with excellent examples of the sort of companies that he likes so much, i.e. those with strong brands and plenty of pricing power. Here are a few ideas:

• Diageo (10%)
  In addition to the obvious (high return on equity, tremendous brand power and generations of merry customers), we also have a bit of evidence to go on with this one. All the way back in 1990 Buffett’s first ever significant foreign investment was in none other than… Guinness (the evidence), which he compared to another beverage company (Coca-Cola) for its generating the majority of its profits overseas. Guinness is as good today as it was then. Current yield 2.75%
• Reckitt Benckiser (10%)
  Another brand shop, RB is also a dream company: Clearasil, Durex, French’s, Dettol, Scholl, Finish, Lysol, Neurofen, Vanish, Durex, Gaviscon, Strepsils, Cillit Bang, Harpic. Admittedly, there are a lot of “stupid products” in this list, but how many have you bought or used in the last year? I am sure Buffett would fancy adding some of these to the Berkshire shelf. Current yield 2.49%
• Unilever (10%)
  Nothing too clever here either: Comfort, Dove, Hellmann’s, Knorr, Lipton, Magnum, Ben & Jerry’s, Brut, Carte d’or, Cif, Marmite, Popsicle, Mazola, Solero, TresSemme, and Vaseline. (There are many more.) Current yield 3.25%
• British American Tobacco (10%)
  Ok, this suggestion might be mildly controversial, however, Buffett has owned tobacco companies (RJ Reynolds) in the past and we know that he likes the business (“I’ll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty.“) I don’t think he wants any involvement in 2015 for various reasons, but evaluating the business strictly as a business, I believe it would continue to tick a lot of his boxes. Incidentally, British American Tobacco owns 42% of Reynolds and so there is another tangible–albeit historically distant–Buffett link. Current yield 4.18%
• AG Barr (5%)
  Maker of the iridescent and indescribably flavoured cult Scottish soft drink Irn-Bru, AG Barr also produces a wide range of other soft drinks. The only country in which Coca-Cola has failed to secure market leadership, Scotland shows furious loyalty to the luminous orange concoction and the business has done well as a result paying its owners steadily growing dividends. Current yield 2%

Industrials

• Rolls Royce (5%)
  Everyone knows the aphorism about the bad business winning out over the good management, well Rolls Royce is (hopefully) the opposite case. Their business is–on the surface–quite simple: sell engines at a loss and then make money by servicing them over the decades that follow. Rolls is one of a duopoly in this industry (wide body aircraft) and the barriers to entry are insurmountable (capital expenditure and government regulation). So, why hasn’t it done better than it has? Because it also owns a marine engine business without the barriers to entry and heavily exposed to the cyclical oil industry.  Buffett link? Sequoia, the legendary American value shop founded by Buffett’s old friend Bill Ruane, is an investor in Rolls has been leading calls for better capital allocation. Let’s hope the recent change of management will bring about some improvement and they take full advantage of the growth opportunities on the runway. Current yield 2.6%

Healthcare

• GlaxoSmithKline (5%)
  A position recently liquidated by Berkshire, Glaxo is a huge British pharmaceutical company that has had a trying year. Pipeline issues have been exacerbated by troubles in China and pricing pressures in the US. Nevertheless, it pays a remarkable–if flat–5.9% dividend and offers that high Return on Equity so beloved of Buffett. I am adding it to my British Buffett portfolio because it looks a decent current bet, even if it wasn’t quite good enough to retain its place in the global Berkshire portfolio, and he has history with it. Current yield 5.9%

Consumer Services

• Sky (5%)
  Satellite tv broadcaster, broadband provider and long-time Murdoch target BSkyB is a well-run company with a dominant position in British pay-tv. Increasingly challenged by BT, Sky seems to be responding well and continues to add subscribers at a good rate. Always well run and with plenty of pricing power, Sky has seen off rival after rival over the years. Current yield 3%

Utilities

• SSE (5%)
  The third largest supplier of electricity and gas in the UK, SSE is my pick to replace Buffett’s MidAmerican Energy Holdings. SSE is a perennial subject of takeover gossip and it is likely to be a matter of time before its reliable but regulated revenue stream is siphoned off into happy private hands. Current yield 5.5%

Financials

• Admiral Group (10%)
  The British Geico, Admiral specialises in low-cost car insurance for young drivers, city dwellers and high performance drivers. Buffett would perhaps look to take this one private? Current yield 6%
• Lloyds Banking Group (10%)
  Still part-owned by the British government, Lloyds was a solidly run (i.e. boring) bank until either madness took hold or they were leaned upon by higher powers to make an ill-advised acquisition at the peak of the Financial Crisis. Regardless, they have finally digested HBOS and with the government gradually divesting itself of its remaining stake, a return to the good old days looks to be on the cards. Current yield 3-3.5%
• Beazely, Hiscox, Amlin (10 %)
  A basket of underwriters at Lloyd’s: Beazely writes speciality-risk and re-insurance (current yield 3%), Hiscox provides specialist or unusual insurance such as for fine art or against terrorist attacks (current yield 3%), and Amlin specialises in aviation, marine, property, casualty, and commercial motor insurance (current yield 5.6%).
• PayPoint (5%)
  Ok, it’s hardly AMEX but the toll bridge concept is similar. PayPoint started out by setting up fee-charing ATM machines, and now enables bill payers to pre-pay mobiles and energy metres. With a return on invested capital of about 50% and operating margins of 22% it is a nice business. Current yield 3.7%

Disclosure: Long DGE, GSK, RB. BATS, ULVR, and RR..
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.