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 Kimberly-Clark (NYS: KMB) -- 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 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:
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does Kimberly-Clark 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 Kimberly-Clark's earnings and free cash flow history:
Source: S&P Capital IQ.
In recent years, Kimberly-Clark's earnings and free cash flow have held relatively consistent.
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.
Return on Equity
5-Year Average Return on Equity
Procter & Gamble
Source: S&P Capital IQ.
Kimberly-Clark tends to generate high returns on equity while employing moderately high amounts of debt.
CEO Thomas Falk has been at his current job since 2002, and he's served in other roles with the company for many years.
The paper industry may have been undergoing rapid technological change early in the 20th century, but today personal-care and paper products aren't particularly susceptible to technological disruption.
The Foolish conclusion
So is Kimberly-Clark a Buffett stock? Perhaps. It exhibits several of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with more-or-less limited debt, tenured management, and a straightforward business. To stay up to speed on Kimberly-Clark's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter, where he goes by@TMFDada.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble, Energizer Holdings, and Kimberly-Clark. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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