Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Philip Morris International (NYSE: PM) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform 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 and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno mumbo jumbo businesses.

Does Philip Morris 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 Philip Morris's earnings and free cash flow history:

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Over at least the past five years, Philip Morris has earned fairly stable and rising profits.

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 actually 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.


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity
(5-year average)

Philip Morris




Altria (NYSE: MO)




Reynolds (NYSE: RAI)




Lorillard (NYSE: LO)**




Median Tobacco*




Source: Capital IQ, a division of Standard & Poor's. *Includes medium- and large- cap domestic peers. **Negative equity.

Philip Morris exhibits absurd returns on equity, in part due to its strong competitive advantage, though also due to its huge debt.

3. Management
Philip Morris' CEO, Louis Camilleri, has only been at the job since 2008, when the company was spun off from Altria. However, he has been with Altria in various capacities since 1978.

4. Business
The tobacco business is about as technologically predictable an industry as it gets -- we're probably not dealing with arcane business models or revolutionary new products that could upend established players like Philip Morris.

The Foolish conclusion
Regardless of whether Buffett ever buys Philip Morris, we've learned that the company exhibits several characteristics of a quintessential Buffett investment: consistent earnings power, signs of a competitive advantage, and a simple business. It's possible he would prefer to see a smaller debt load, though the stability of Philip Morris' business could assuage those concerns somewhat.

Ilan Moscovitz doesn't own shares of any company mentioned. Philip Morris International is a Motley Fool Global Gains choice. The Fool owns shares of Altria. The Fool has a disclosure policy.