Why I think Warren Buffett should buy this ASX All Ords share

Three people in a corporate office pour over a tablet, ready to invest.Three people in a corporate office pour over a tablet, ready to invest.

Warren Buffett is one of the world’s richest people and has been a leading investor for decades. I think there are some interesting All Ordinaries (ASX: XAO), or All Ords, ASX shares that would fit right into the Berkshire Hathaway portfolio.

Berkshire Hathaway owns plenty of banks in its portfolio, but there are plenty of other businesses that it invests in, including furniture.

Included in the Berkshire Hathaway portfolio are: Jordan’s Furniture, Nebraska Furniture Mart and Star Furniture. With that in mind, I think that Nick Scali Limited (ASX: NCK) shares would fit into Warren Buffett’s investment strategy for a number of reasons.

Management team

Warren Buffett likes to find businesses that have good management teams. The current managing director of the business is Anthony Scali, who joined the business in 1982. He has almost 40 years’ experience in furniture retailing. He owns just over 11 million Nick Scali shares. That’s a hefty holding considering the Nick Scali share price is around $10 at the moment.

I think it’s a very good sign that the business is still managed by the same family. It naturally makes Anthony Scali very motivated to continue managing the business in a long-term, sustainable way. Ordinary shareholders are very aligned with management.

Growth potential

Nick Scali is looking to grow in a number of different ways.

Warren Buffett likes to find businesses that could have a long growth runway so that they have plenty of compounding potential.

The All Ords ASX share is looking to grow its Nick Scali store network in Australia to at least 85 stores. It’s expanding geographically into New Zealand. It recently bought the Plush furniture business, which also has a store rollout plan. Nick Scali also wants to grow its online sales across the business.

Dividends

Warren Buffett isn’t exactly known for being a dividend investor. But, Nick Scali’s dividend payments are a good boost for overall returns from this business.

In FY22, the All Ords ASX share paid a final dividend of 35 cents per share (up 40%) and total dividend of 70 cents per share (up 6.7%).

The full-year dividend translates into a grossed-up dividend yield of 9.75% at the current Nick Scali share price.

Outlook

Uncertainty may be increasing amid an increase in inflation. Nick Scali itself said that “given the current global economic environment, the business will face challenges in respect of potential rising freight costs and inflationary pressure on operating costs over the next 12 to 24 months”.

But, despite that, it had an elevated order book at the end of June. It also gets a boost from the revenue of the acquired Plush business. It’s expecting the FY23 first-half revenue to be “materially above” the previous year.

July trading was “positive”, with total written sales orders for the group of $43.2 million, up 64.1%.

Foolish takeaway

With the Nick Scali share price valued at just 11x FY22’s earnings, I think it could be worth jumping on considering it has dropped by around 33% in 2022. I think this decline more than makes up for the possible economic decline that could happen in the next 12 months.

The post Why I think Warren Buffett should buy this ASX All Ords share appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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