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 Hartford Financial
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 Hartford 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 Hartford's earnings and free cash flow history.
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Hartford's earnings have fluctuated somewhat over the past few years. The big loss in 2008 was largely due to investment losses.
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 actually 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.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
| Hartford Financial | 32% | 8% | 3% |
|
Prudential Financial |
102% | 9% | 10% |
|
Lincoln National |
44% | 8% | 5% |
|
Principal Financial Group |
24% | 9% | 11% |
Source: Capital IQ, a division of Standard & Poor's.
Over the past few years, Hartford has generated returns on equity almost in line with its peers while employing about the same amount of debt.
3. Management
CEO Liam McGee has been at the job since 2009. Before that, he'd had a number of jobs at Bank of America, including president of its consumer and small business lending.
4. Business
Insurance isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of Hartford, we've learned that although it operates in a fairly straightforward industry, it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management.
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