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This Ridiculously Cheap Warren Buffett Stock Could Make You Richer

Motley Fool - Thu Apr 18, 6:00AM CDT

Warren Buffett is arguably the most famous investor of all time. He is known for building his holding company, Berkshire Hathaway, into one of the world's largest companies. His secret? He buys great companies and keeps them for a long time.

Spirits conglomerate Diageo Plc(NYSE: DEO) is one of Buffett's newer investments; Berkshire bought its shares in the first quarter last year. Interestingly, shares are cheaper now than when Buffett got in. Does that make the stock a bargain you shouldn't ignore, or did Buffett make a mistake?

Diageo will stand the test of time

Not everyone will recognize Diageo's name, but most people of legal drinking age are familiar with its products. The company owns over 200 brands. Its most popular names include Guinness, Johnnie Walker, Tanqueray, Baileys, Smirnoff, Captain Morgan, Crown Royal, and Don Julio.

You wouldn't know if Diageo owned them by looking at the bottle. But make no mistake, Diageo is a consumer products powerhouse. Many of its brands go back generations and have years of brand loyalty and recognition. Beer company Guinness' history goes back to the 1700s!

Alcohol is a cultural staple around the world and has been for generations. It's hard to see that changing overnight, which makes Diageo as likely a company as any to last for decades into the future.

Why might Buffett have bought the stock?

You can't distill Warren Buffett's brilliance into some formula. However, one can see that his stock purchases tend to satisfy some basic rules. First, he loves brand recognition. His largest holdings are companies that almost everyone knows, including Apple and Coca-Cola. Consumers might not recognize Diageo, but as you saw above, they will know its products.

Second, Buffett loves companies that pay dividends. Diageo pays a solid dividend that yields 2.3% at the current share price. Investors should note that Diageo is a European company, so the dividend must be converted into U.S. dollars if you're an American investor. That can impact the payout you receive. Additionally, Diageo pays its dividend twice annually instead of quarterly.

That has nothing to do with the company's health; it's just how some non-U.S. companies do things. Diageo pays a different amount halfway through the year versus its year-end payout, which is why you see the zig-zag pattern below. More importantly, the long-term trend is up:

DEO Dividend Chart

DEO Dividend data by YCharts

Diageo has a history of dividend payments that spans decades. Investors can buy the stock, confident in the dividend and Diageo's ability to afford it with a manageable 81% payout ratio.

Lastly, Buffett doesn't like to overpay for any stock. He only buys when he sees adequate value in the stock relative to its intrinsic value. Today, shares trade at their lowest price-to-book value since the COVID-19 market crash in 2020:

DEO Price to Book Value Chart

DEO Price to Book Value data by YCharts

Should investors buy the stock today?

Diageo won't make you rich overnight. Analysts estimate the company is poised to grow earnings at a mid-single-digit annual rate over the next three to five years. But Diageo can undoubtedly help you build wealth. Steady earnings growth and a dependable dividend have added up over the years, and that's precisely how Buffett built his fortune with Berkshire Hathaway.

Investors get a recession-resistant, technology-proof, diversified business that will churn out slow and steady returns for as long as they want to own it. As a bonus, investors can get the stock for less than the great Warren Buffett paid. That's nothing to shake a stick at.

Should you invest $1,000 in Diageo Plc right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Diageo Plc. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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