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If I were Warren Buffett, I would buy this FTSE 250 firm!


Image source: The Motley Fool

Among the great investors of today, one name stands head and shoulders above the rest. For me, the greatest investor in the world is Warren Buffett, the chairman of the American mega-conglomerate Berkshire Hathaway.

Warren Buffett (92 in August) has been investing in stocks since he was 11 years old. After more than 80 years of high returns, his personal fortune is $103.7 billion. However, he has donated more than $49 billion to good causes and intends to give 99% of his fortune to charity. Wow.

Warren Buffett likes to own insurers

Warren Buffett runs a diverse group of businesses under the umbrella of Berkshire Hathaway. These include insurance companies, a major railroad, a battery manufacturer, clothing and jewelry firms, and consumer goods companies. Today, Berkshire is worth a whopping $655 billion. But it is well known that Warren Buffett loves the economics of insurance companies.

Indeed, one of the four pillars of Berkshire Hathaway’s success is its various insurance subsidiaries. These companies collect premiums upfront but pay claims later. This generates a “float” of cash and tradable securities that are invested to increase the company’s returns. In 2021, the Berkshire Hathaway stock brought the group $9 billion. Nice.

“Price is what you pay; value is what you get”

Warren Buffett made the above comment in his 2008 letter to Berkshire shareholders. And I know that as a value investor (as I am) he likes to buy stocks of quality companies when they are discounted or on sale.

I noticed one well-known, well-respected insurance company in the UK that Buffett could have bought on the cheap is now valued at less than £2.7 billion. My ‘Buffett business’ is the UK’s leading insurance company Direct Line Insurance Group (LSE: DLG). For the record, my wife purchased Direct Line shares at the end of July at full price (including stamp duty and purchase charge) of just over £2.

Five Reasons Buffett Should Buy Direct Line

Although I’m guilty of talking about my own book here, if I had an extra £3 billion or more lying around I’d happily buy Direct Line in a heartbeat. In reality, any takeover bid would have to be made at a significant premium to current market value, but you get my point, right?

Here are five reasons why I would urge Warren Buffett to take it on FTSE 250 firm:

  1. Less than £4bn is pocket change for Berkshire Hathaway, which has around $70bn (and growing fast).
  2. Direct Line has great consumer brands (including the famous red phone on wheels) and operates over 13.2 million policies across a wide range of competitively priced insurance products.
  3. It has a strong balance sheet, with a “capital solvency ratio” of 52% above the regulatory minimum.
  4. The company’s dividend yield of nearly 11.2% per year is one of the highest in FTSE 350 index.
  5. Although this cash yield is only covered by 0.9 times trailing earnings, the group has no plans to cut this payout.

Also on the P/V front, Direct Line shares hit a 52-week high of 313.7p on January 19, more than 50% above their current price of 203.4p. In my opinion, Warren Buffett should run DLG before it gets more expensive. But the storm clouds (inflation, energy bills, higher interest rates) are gathering over UK consumers and could hurt corporate profits, so I could very well be wrong. However, I have long-term hopes for these stocks, so I can buy more shares!

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