Investing guru Warren Buffett is now worth an estimated $100bn. No wonder so many investors try to apply his straightforward principles in their own investment decisions.
Lately I have been considering a UK share I think meets a lot of the investment criteria Buffett typically applies to buying shares. Here I share why.
Little known but much loved
The stock in question is Spirax-Sarco Engineering (LSE: SPX).
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If you have never heard of it, you are not alone. The specialist engineering firm is not a household name. That is because its main focus is B2B. It supplies engineering products and services to a wide range of customers around the globe. Its main profit driver is steam, but it also has electric thermal solutions and a well-regarded pump business.
Steam hardly sounds like the business of the future! But in fact, all of the company’s offerings have applications in industrial processes such as manufacturing.
Warren Buffett talks about a business having a “moat” – a competitive advantage which makes it difficult for other companies to muscle in on its business area. Spirax-Sarco’s proprietary engineering designs, talented team, and extensive customer relationships form such a moat in my view. If a customer purchased a pump from them before, they would be the obvious choice to maintain or replace it.
Another characteristic that matches Warren Buffett’s investment criteria is the company’s pricing power. Pumps and valves may sound like a commodity market. But, in fact, a lot of Spirax-Sarco revenues come from bespoke solutions designed for a specific customer situation. If a company is running a factory, oil rig, or power station and has to take it offline because of a faulty component, the loss can run into thousands of pounds an hour in some cases. So the sorts of customers Spirax-Sarco targets tend to value quality over price. That gives the company pricing power.
Outstanding dividend record
There aren’t many UK shares that have raised dividends annually for decades.
Spirax-Sarco raised its dividend last week by 7% – a healthy increase. But what impresses me even more is that is just the latest annual raise in an unbroken stretch covering half a century.
Of course, to keep raising dividends in the future, the company will need to maintain and grow earnings. Revenue fell 4% last year and the company only eked out a 1% increase in pre-tax profits. A slowdown in business activity is bad for demand, and any future recession could impact the company negatively.
Even Warren Buffett makes mistakes
Such a share is bound to have its admirers. That pushes the price up. Even after all those dividend increases, Spirax-Sarco is only yielding 1%. That reflects the fact that the share is so popular and heavily bought.
In 2016, Buffett bought a company which made precision engineering components for mission-critical applications. Yet in his insightful letter to shareholders last month, Buffett called the purchase a mistake as he “paid too much”.
Could the current price for Spirax-Sarco be too high? It’s just 8% lower than its all-time peak. If it falls out of fashion or the business starts to struggle, it has a long way to fall down. But its business model gives it a lot of the characteristics of a share I’d choose using Warren Buffett investment criteria.
