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 New York Community Bancorp
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 New York Community Bancorp 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 New York Community Bancorp's earnings history:
Source: S&P Capital IQ.
Like much of the financial industry, New York Community Bancorp's earnings took a big hit in the 2008 financial crisis, though this bank's earnings have rebounded pretty dramatically.
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 commonly used for banks. In the United States, about 10 to 12 times is considered normal.
|
Company |
Leverage Ratio |
Return on Equity |
5-Year Average Return on Equity |
|---|---|---|---|
| New York Community Bancorp | 7.6 times | 9% | 7% |
| Hudson City | 9.9 times | (15%) | 4% |
| First Niagara Financial | 6.8 times | 5% | 5% |
| People's United Financial | 5.3 times | 4% | 3% |
Source: S&P Capital IQ.
Each of these banks has a fairly limited leverage ratio. With a flattening yield curve, a less-than-ideal loan environment, and fees getting hit across the board, these aren't especially great times for the banking industry. None of these companies generates a particularly high return on equity, though New York Community Bancorp's is pretty impressive for the company's limited degree of leverage.
3. Management
CEO Joseph Ficalora has been at the job since the bank was founded in 1993. He's also a director of American Bankers Association, a powerful banking lobby.
4. Business
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 New York Community Bancorp a Buffett stock? Perhaps. The company does exhibit several of the characteristics of a quintessential Buffett investment: consistent (or, at least resilient) earnings, (reasonably) high returns on equity with limited debt, tenured management, and a straightforward industry. If you're looking for some other 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.
