Why I’d buy this stock in 2023 using Warren Buffett’s advice

Gabriel McKeown outlines a share he’d add to his portfolio next year, inspired by the advice of investment icon Warren Buffett.

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I’ve been inspired by Warren Buffett, the renowned value investor, from the very beginning of my investment journey. His strategy of buying cheap, holding for the long term and consequently outperforming has always been an intriguingly simple approach.

Despite this, it’s a method that’s more challenging to implement than it appears, as selecting the right stocks is crucial. I’ve found that it requires a great deal of discipline and patience to wait for the right opportunity. This usually occurs when the market neglects high-quality companies. That means a current share price no longer reflects the actual value of a business.

The Buffett approach

Due to the research-heavy initial approach used by Buffett, this isn’t the most exciting form of investing. Furthermore, once a high-quality company is identified, I must resist the urge to purchase until the price is out of sync with its strong fundamentals.

For this reason, I like to automate this process of finding and assessing a Buffett-style company by using market screeners. This will notify me when a company with the characteristics I want enters a suitable price range and thus could be of interest.

My Warren Buffett-inspired filter has highlighted Rio Tinto (LSE: RIO) as a potential opportunity. The company is a diversified global miner, focusing primarily on iron ore, aluminium, copper and minerals. The share price has been relatively static over the last few years, following an initial rise of 21.5% in 2020, a fall of 10.6% in 2021, and just over a 3% decline this year.

Core characteristics

Within my filter, I’m looking for companies that have consistently grown earnings and achieved a steady increase in profit margins. In addition, I want companies to have relatively low levels of borrowing, and plenty of positive cash flow. Unsurprisingly, Rio Tinto has these core characteristics. The company has impressive earnings efficiency on invested capital, and a strong ability to generate cash from operations.

Dividend earning potential

In addition, the company is paying a dividend yield of 12%, although this is forecast to decrease to 10.1% next year. Despite the decline, this is still considerably higher than the index average of 3.7%.

It has also paid a dividend consistently for the last 12 years and has grown the dividend for the previous five. This is very encouraging, and consistent dividends are a core requirement for Buffett. This is due to the stable investment returns potential of the company via dividends.

But it’s important to note that currently low share price multiples may be somewhat justified. A fall of 14.3% in turnover is forecast next year, and earnings per share are set to drop by a considerable 32.7%. In addition, the forecast dividend reduction is another sign that underlying performance may be about to decline significantly next year.

Nonetheless, I believe the company represents an excellent long-term investment opportunity and aligns with the Warren Buffett investing style. Therefore I’ll add Rio Tinto to my portfolio next year once I have the necessary funds for the purchase.

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.

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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