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.
While we can't know for sure whether Buffett is about to buy DuPont
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 DuPont 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 DuPont's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Except for the 2008-2009 recessionary dip, DuPont has maintained pretty consistent earnings over the past five years.
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 among 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) |
|---|---|---|---|
| DuPont | 118% | 31% | 28% |
|
Dow Chemical |
80% | 13% | 11% |
|
Eastman Chemical |
84% | 32% | 19% |
|
Huntsman |
187% | 15% | 11% |
Source: Capital IQ, a division of Standard & Poor's.
DuPont tends to generate very high returns on equity while employing a moderately high amount of debt (although it is well within industry norms).
3. Management
CEO Ellen Kullman has only been at the job since 2008 and has served in other roles with the company for over three decades.
4. Business
The diversified chemicals industry requires constant research, but it's also not particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of DuPont, we've learned that it exhibits all of the characteristics of a quintessential Buffett investment: fairly consistent earnings, high returns on equity with reasonable debt, tenured management, and a straightforward business.
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