Warren Buffett reveals his biggest holdings including UK’s Diageo

Every quarter we get a peek at the list of stocks owned by Buffett’s Berkshire Hathaway investment vehicle. This time there’s some UK interest.

A Diageo (LSE:DGE) investment that ranks as a mere tipple in a vast Berkshire Hathaway (NYSE:BRK.B) portfolio worth $325 billion had an outsized impact on the drinks giant’s profile today.

In filings disclosed last night, it emerged that the investment company of legendary stock picker Warren Buffett had built a holding worth $41.3 million (£33 million) through the purchase of 227,750 American depository receipts (ADRs) on the New York Stock Exchange.

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The endorsement from the Sage of Omaha ensured the London-listed shares of the Guinness and Johnnie Walker maker enjoyed a strong session by rising 50p to 3,588p today. That compares with 3,750p a month ago and above 3,900p last summer.

Berkshire Hathaway’s interest in Diageo fits with Buffett’s long-held strategy of using market downturns to pick up quality stocks that are highly profitable with a proven track record.

All the buying appears to have taken place since the turn of the year, given that Diageo is not mentioned in Berkshire Hathaway’s previous December-end portfolio update.

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The most recent update discloses a total of 48 holdings, with a remarkable 77% continuing to be the big five of Apple Inc (NASDAQ:AAPL), Bank of America Corp (NYSE:BAC), American Express Co (NYSE:AXP), Coca-Cola Co (NYSE:KO) and Chevron Corp (NYSE:CVX). Other consumer-focused stocks alongside Diageo include Toblerone maker Mondelez International (NASDAQ:MDLZ) and Procter & Gamble Co (NYSE:PG).

The recent pressure on Diageo’s valuation reflects the uncertain economic outlook for its key US market, the fading of pandemic tailwinds and ongoing elevated costs.

Despite these factors, Diageo’s half-year results showed a strong start to the financial year, after a 9.4% improvement in net sales to £9.42 billion helped to lift operating profit by 15.2% to £3.2 billion. The interim dividend grew 5% to 30.83p a share.

Chief executive Ivan Menezes highlighted the progress in the organic operating margin despite the challenging cost environment. He added: “Today, Diageo is 36% larger than it was prior to Covid-19, reflecting the strength of our diversified footprint and advantaged portfolio.”

The view of Diageo as a core long-term holding is one emphatically endorsed by London-based stock picker Nick Train. His Finsbury Growth & Income (LSE:FGT) Trust has the drinks giant as its second-largest holding, alongside RELX (LSE:REL), London Stock Exchange Group (LSE:LSEG) and Burberry Group (LSE:BRBY).

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In the current economic conditions, he said Diageo offered a “rare and valuable combination” of inflation protection and secular growth. Despite slowing sales in North American he believes it is hard to argue against the fact that selling premium spirits brands to the US consumer is not structurally a great category to be in.

Train told investors earlier this year: “I think Diageo is an ideal investment to hold in any economic circumstances and forever.”

He pledged to buy more shares, adding that buybacks by management will increase the scarcity of the remaining shares held by non-sellers “like us”.

Deutsche Bank agrees that Diageo is a high-quality company in an attractive sector, but analysts said yesterday that consensus estimates remain too optimistic.

They believe that none of the US headwinds are reflected in the current price, with Diageo’s forward multiple of 20.7 times a 4% premium to European beverages and a 58% premium to the European market.