Is AT&T a Buffett Stock?

Before you go, we thought you'd like these...
Before you go close icon

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy AT&T (NYS: T) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does AT&T meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine AT&T's earnings and free cash flow history:

anImage

Source: S&P Capital IQ.

Source: S&P Capital IQ.

Over the past several years, AT&T's earnings and free cash flow have fluctuated a fair bit from its operations.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

AT&T generates a moderately low return on equity -- 4% over the past year, 9% on average over the past five years -- while employing a moderate 61% debt-to-equity ratio.

3. Management
CEO Randall Stephenson has been at the job since 2007. Before that, he held various other positions in the company and has been in the industry for decades.

4. Business
Despite its reputation sometimes as a club for stodgy dividend payers, the telco industry is heavily affected by the rapidly changing handset market; the increasing popularity of the iPhone, for instance, has put the squeeze on carriers' margins by forcing them to subsidize the popular device.

The Foolish conclusion
So is AT&T a Buffett stock? Probably not. Tenured management notwithstanding, the company doesn't particularly exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity, and a straightforward business.

If you're looking for some great dividend stocks, I suggest you check out "Secure Your Future With 9 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these nine generous dividend payers.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned. The Motley Fool has adisclosure policy.
We Fools don't all hold the same opinions, but we all believe that
considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners