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 (NYSE: 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 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 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:
Source: S&P Capital IQ.
AT&T's earnings have been more or less consistent over the past five years, with the exception of 2008, when the company was weighed down by unusually high operating costs.
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.
|
Company
|
Debt-to-Equity Ratio
|
Return on Equity
|
5-Year Average Return on Equity
|
| AT&T (NYSE: T ) |
63% |
11% |
10% |
| Verizon (NYSE: VZ ) |
63% |
17% |
12% |
| Sprint Nextel (NYSE: S ) |
142% |
(18%) |
(25%) |
| MetroPCS (NYSE: PCS ) |
169% |
8% |
7% |
Source: S&P Capital IQ.
AT&T generates somewhat modest returns on equity while employing a moderate amount of debt.
3. Management
CEO Randall Stephenson has been at the job 2007. Before that, he was at AT&T for a number of years in various roles, back when it was called SBC.
4. Business
Integrated telecommunications services are constantly changing to meet new technologies, though they're not particularly susceptible to technological disruption.
The Foolish conclusion
So is AT&T a Buffett stock? Probably not, given the company's decent-but-not-incredible returns on equity. Things are a bit more mixed with respect to its earnings consistency and sensitivity to changing technologies, though the company does have a fairly long-tenured CEO. To stay up to speed on AT&T'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 by watchlist of your favorite stocks.
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