3 Reasons Why Warren Buffett Should Buy Tim Hortons Inc.

One of my favorite books is The Snowball, the biography of Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) CEO and legendary investor, billionaire Warren Buffett. I’m currently reading it for the third time, focusing this time on Buffett’s investing wisdom and less on the man’s fascinating life.

Over the years, Buffett evolved from a purely mechanical value investor to a man willing to pay a premium for quality companies. This evolution coincided with the growth of his assets, especially when Berkshire Hathaway grew too large to take positions in ultra-cheap small-caps.

Most investors think of Charlie Munger, Berkshire’s chairman, as Buffett’s partner, but they significantly understate the influence he had on Buffett’s mindset. It was Munger who first convinced Buffett that paying for quality and holding for the long term was more intelligent than the style of investing he previously practiced.

Now that Berkshire has more than $50 billion in the bank, Buffett must be itching to do a deal. Luckily for the Oracle of Omaha, I have an idea. Buffett has spent the last decade diversifying away from the U.S., so this is a natural fit.

I think Buffett should buy Tim Hortons Inc. (TSX: THI)(NYSE: THI). Here are three reasons why.

1. Terrific moat

One of the things many investors look for in a company is an enduring competitive advantage, something that can’t be easily replicated by competitors. It can be anything: a vital piece of technology, a plant or process that cost billions to build, or a brand that just can’t be beat. Tim Hortons clearly falls into the third category.

Approximately 80% of all coffee served in Canada is poured into Tim Hortons mugs. That’s astounding, especially considering how aggressive both McDonald’s Corporation (NYSE: MCD) and Starbucks Corporation (NASDAQ: SBUX) have been expanding their operations in Canada.

In fact, Tim Hortons is such a strong Canadian brand that the public might be outraged if it fell into American hands, even to someone as popular as Buffett. That’s how strongly Canadians feel about their “Timmys”.

2. Growth potential

When one looks at Buffett’s investments, another theme emerges. He generally buys mature businesses, but ones that still have potential for growth, whether domestically or internationally.

Tim Hortons fits the bill. Even though the chain has more than 4,000 stores across Canada and the northeastern United States, it plans to open 500 new stores in Canada over the next five years, as well as 300 in the United States. Investors should be especially excited about the company’s potential in the U.S., considering the strong same-store sales it recently posted there and its limited geographical footprint.

The company’s growth in Canada will depend on one thing — getting coffee drinkers to purchase something else when they show up for their morning cup of joe. There have been some hiccups, but the plan looks to be gaining traction.

3. Strong dividend growth

Even though Buffett himself isn’t a dividend growth investor, he knows that a consistently rising dividend is a signal of a lot of other good things going on with a company. Many of his largest investments regularly pay him a dividend.

Since 2010, Tim Hortons has more than doubled its dividend, rising from $0.52 per share to a projected $1.28 per share in 2014. The payout ratio is approximately 40% of earnings. Look for yearly dividend raises for the upcoming future.

Tim Hortons has an impregnable moat, strong financials, good growth potential, and a terrific return on equity. It fits Buffett’s criteria nicely. Even if he doesn’t look at acquiring the company, investors should look at adding some of its stock to their portfolios.

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Fool contributor Nelson Smith has no position in any stocks mentioned. David Gardner owns shares of Starbucks. Tom Gardner owns shares of Starbucks. The Motley Fool owns shares of Berkshire Hathaway and Starbucks.

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