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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 Regions Financial (NYSE: RF ) -- 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 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 Regions 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 Regions' earnings history:
Source: S&P Capital IQ.
Like much of the financial industry, Regions' earnings took a big hit in the 2008 financial crisis, and while earnings have recovered considerably from that year of massive writedowns, they've yet to return to positive territory over an entire fiscal period. (Regions was profitable from the first through the third quarter last year).
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.
Let's look at a leverage ratio defined as assets divided by equity, which is commonly used for banks. In the United States, about 10 to 12 times is considered normal.
We'd expect Regions to play it safe with leverage due to its substantial commercial loan exposure, and a ratio of 7.7 seems reasonable. Over the past year, Regions has produced a negative 0.2% return on common equity, though that's an improvement from its average over the past five years (negative 6%). Regions still owes bailout money, though its sale of Morgan Keegan should help it to raise some cash.
Regions' CEO is a Mr. O.B. Grayson Hall Jr., who's been at the job since 2010. Prior to that, he'd spent years in several positions at AmSouth Bancorp before spending about a year as Regions' chief operating officer.
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 Regions a Buffett stock? Probably not. Although it has limited leverage and operates in an industry Buffett feels comfortable with, it doesn't particularly exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity, and tenured management. However, if you're looking for a bank stock that does share the characteristics that could interest Buffett, check out The Motley Fool's "The Stocks Only the Smartest Investors Are Buying." I invite you to read this special report for free by for free by clicking here.