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 DuPont (NYSE: DD ) -- 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 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 history:
Source: S&P Capital IQ.
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 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
|
| DuPont |
129% |
32% |
28% |
| Dow Chemical |
78% |
13% |
11% |
| Eastman Chemical |
84% |
31% |
19% |
| Huntsman |
212% |
11% |
11% |
Source: S&P Capital IQ.
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 been at the job only since 2008 but has served in other roles with the company for more than three decades.
4. Business
The diversified chemicals industry requires constant research, but it's also not particularly susceptible to wholesale technological disruption. And last year, Buffett did acquire fellow chemical maker Lubrizol.
The Foolish conclusion
So is DuPont 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 DuPont'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.
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