3 cheap shares I think Warren Buffett would like

Warren Buffett built a $114bn fortune by investing in great businesses. Here are three shares in quality UK companies that I think he’d like to own today!

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Buffett at the BRK AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In 35 years as an investor, I have had one big hero. He is American mega-billionaire Warren Buffett, nicknamed the ‘Oracle of Omaha’. Buffett’s personal fortune exceeds $114bn, despite having donated $45bn to good causes. In 80 years of investing (since the age of 11), Buffett is widely regarded as the world’s best value investor. Here are three quality shares that I don’t own, but believe Warren Buffett would be happy to buy today.

Warren Buffett share #1: Lloyds Banking Group

In his 2008 letter to Berkshire Hathaway shareholders, Warren Buffett wrote, “Price is what you pay; value is what you get”. For me, shares in Lloyds Banking Group (LSE: LLOY) appear cheap today. As I write, Lloyds shares trade at 52.5p, valuing the bank at £37.3bn. That’s a modest price tag for a group with 30m customers, 65,000 staff, and a host of market-leading brands. Also, Lloyds is the UK’s top mortgage lender and a leading provider of credit to businesses and households.

Despite this, Lloyds shares don’t look expensive to me. They trade on eight times earnings and offer an earnings yield of 12.5%. During 2020’s Covid-19 crisis, Lloyds cancelled its dividend, before restoring it in July 2021. Though Lloyds’ dividend yield is just 2.4% a year, analysts expect it to rise. I suspect that such undemanding fundamentals would appeal to Warren Buffett’s value instincts. However, Lloyds could suffer steep loan losses were Covid-19 to make another comeback.

Great business #2: Diageo

Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. In other words, it’s worth paying premium prices for quality stocks. Take this brilliant British business: drinks giant Diageo (LSE: DGE). Diageo sells more than 200 drinks brands in over 190 countries, including gin, whisky, vodka, and rum. Some of its top brands date back four centuries.

As I write, Diageo shares trade at 3,806.18p, valuing the business at £88.3bn. That’s big enough for Warren Buffet to buy a decent stake in. Today, Diageo stock trades on 29.3 times earnings, with an earnings yield of 3.4%. The dividend yield is under 2% a year, making Diageo fairly expensive in FTSE 100 terms. But it has a wide ‘competitive moat’ around its business, which Buffett loves. Then again, if coronavirus surges and spoils the party, then Diageo’s sales could plunge — as happened during earlier lockdowns.

Quality stock #3: Unilever

Warren Buffett also said, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”. Consumer-goods Goliath Unilever (LSE: ULVR) is one great business whose shares slipped in 2021-22. Over the past year, Unilever shares have tumbled from a high of 4,388p on 20 July 2021 to a low of 3,450p on 19 January. As I write, they trade at 3,865.50p, valuing the group at £99.4bn — a market super-heavyweight. As with Diageo, I like Unilever for its veritable warehouse of household brands. One in three people worldwide use Unilever products every day. Wow.

I know Warren Buffett also admires Unilever, because he tried to buy it in January 2017. Today, Unilever trades on 22.2 times earnings, for an earnings yield of 4.5%. The dividend yield of 3.8% a year is broadly in line with the wider FTSE 100. However, Unilever’s sales growth has slowed lately, dropping to 1.9% in 2020. Even so, I’d happily buy and hold this quality company for the long term!

Created with Highcharts 11.4.3Unilever PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Lloyds Banking Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Can this FTSE 250 underperformer turn things around in 2025?

After underperforming since its IPO, shares in Dr Martens have finally started to show some life. Is 2025 the year…

Read more »

Investing Articles

Here’s what £20,000 invested in Rolls-Royce shares at the start of 2024 is worth today

2024 was another brilliant year for Rolls-Royce shares, which almost doubled investors' money. Harvey Jones now wonders if the excitement…

Read more »

Investing Articles

Ahead of its merger with Three, is Vodafone’s share price worth a punt?

The Vodafone share price continues to fall despite the firm’s deal to merge with Three being approved. Could this be…

Read more »

Dividend Shares

3 simple passive income investment ideas to consider for 2025

It’s never been easier to generate passive income from the stock market. Here are three straightforward investment strategies to consider…

Read more »

Investing Articles

I was wrong about the IAG share price last year. Should I buy it in 2025?

The IAG share price soared in 2024 and analysts are expecting more of the same in 2025. So should Stephen…

Read more »

Investing Articles

Here’s the dividend forecast for National Grid shares through to 2027

After a volatile 12 months, National Grid shares are expected to provide a dividend yield of 4.8% for the company’s…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

2 exceptional growth funds that beat Scottish Mortgage shares in 2024

Scottish Mortgage shares generated double-digit returns for investors in 2024. But these two growth-focused investment funds did much better.

Read more »

Investing Articles

If a 40-year-old put £500 a month in S&P 500 shares, here’s what they could have by retirement

A regular investment in S&P 500 shares could help a middle-aged person build a million-pound portfolio. Royston Wild explains.

Read more »