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Would Warren Buffett think this is a “wonderful company”?

T Sligo
close-up photo of investor Warren Buffett

If your bank holiday was anything like mine, you might have spent part of it going through the FTSE 100 and trying to find a company trading at a price below its intrinsic value. I made a list of the companies that I deemed to be good businesses. I was trying to find a company with a strong management structure and a competitive edge. 

There were several businesses that caught my eye. The next step was to look at the corresponding share price. Did the price represent good value and was there a margin of safety? You might have come to the same conclusion that I did: a lot of companies are valued at too high a price. 

Warren Buffett has a saying: “It is better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

With that in mind, how did my list look?

At the top was one particular company: Unilever (LSE: ULVR). With a price-to-earnings ratio hovering around 23, this is not a bargain buy. In fact, many people reckon that it may be too late to buy Unilever shares. The dividend yield of 2.7% isn’t exciting, either. Added to that, when I tell you that sales grew at a lower than forecasted rate of 3.3%, you may wonder why I was interested in the company in the first place.

Well, with a long list of household consumer brands – including Marmite, Dove, PG Tips, Ben & Jerry’s, and many others – Unilever seems to be a company for all .

Earlier this month, UK and global equity markets have been turbulent, as the US Treasury yield curve inverted, with long-term yields trading below short-term yields. Spooked investors sense a recession is on the horizon. If they are correct, I have a hunch that many of Unilever’s products will still be purchased, even if customers do try to find some cheaper alternatives, such is the strength of brand loyalty.

We know that Buffett likes Unilever’s business. Kraft Heinz, a business which Buffett’s Berkshire Hathaway has a large holding in, attempted to buy the business in 2017. The failed Kraft Heinz deal valued Unilever at 4,000p per share, far below the 5,000p of today’s price. Would Warren Buffett buy at this level?

No one can say for sure. However, with the brands in its portfolio, I think Unilever is a great company. The main obstacle for potential investors is that Unilever has never looked like a bargain. Yet it has provided solid returns over the years, while the share price has increased by almost 90% in the last five years – now that’s telling!

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The Motley Fool UK owns shares of and has recommended 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.

Motley Fool UK 2019