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 Synovus Financial (NYSE: SNV ) -- 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.
Although Synovus is probably too small for Buffett to literally buy, does it 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 Synovus' earnings history:
Source: S&P Capital IQ.
Synovus suffered more than many of its troubled banking peers during the financial crisis and market downturn, though it's beginning to pick itself up off the pavement, having turned a profit in both of the past two quarters.
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 is commonly used for banks. In the United States, less than 10 to 12 times is considered normal.
Synovus is still a turnaround in progress -- it generated a -2% return on equity over the past year and -16% on average over the past five years. Its leverage ratio is a reasonable 9.6 times.
CEO Kessel Stelling has been at the job since 2010. Prior to coming to Synovus, he'd held top spots in other banks such as Riverside and First National Bank of Cobb County.
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 Synovus a Buffett stock? It doesn't look like it. Although the company may be on the cusp of a turnaround, it doesn't yet exhibit some of the characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt. However, if you're looking for a bank stock that might have interested Buffett in his earlier years, check out The Motley Fool's "The Stocks Only the Smartest Investors Are Buying," which details an intriguing name that has some of the best operational metrics around. I invite you to read this special report for free by for free by clicking here.