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 BB&T (NYS: BBT) -- 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 his most 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:
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does BB&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 BB&T's earnings history:
Source: S&P Capital IQ.
Like much of the financial industry, BB&T's earnings dipped during the 2008-2009 financial crisis, though this bank's earnings have rebounded.
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-to-equity ratio, 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. Let's use a leverage ratio defined as assets divided by equity, which is commonly used for banks. In the United States, about 10 to 12 times is considered normal.
BB&T generates pretty reasonable returns on equity for a bank -- 9% on average both over the past year and on average over the past five years. It carries a leverage rate of 9.8 times.
CEO Kelly King has been at the job since 2008. He's been at the company for more than three decades in various other positions including chief operating officer.
The banking industry isn't especially susceptible to technological disruption, but as the past several years have shown us, banks that delve too deeply into complexity and risk can be vulnerable to credit and economic cycles, as well as disasters of their own making. Megabank Wells Fargo is a major longtime Buffett holding, as are Bank of America preferred shares.
The Foolish conclusion
So is BB&T a Buffett stock? Perhaps. The company does exhibit several of the characteristics of a quintessential Buffett investment: fairly consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward industry. If you're looking for some other promising bank stocks that might interest Buffett, check out The Motley Fool's "The Stocks Only the Smartest Investors Are Buying," which details some excellent bank stocks that might share the characteristics of a Buffett bank investment. I invite you to read this special report for free by for free by clicking here.
At the time thisarticle was published Ilan Moscovitz doesn't own shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.