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
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 Synovus 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: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author’s calculations.
Since the financial crisis, Synovus has struggled to generate profits, largely because of sliding net interest income and booming provisions for bad loans.
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.
|
Company |
Tier 1 Capital Ratio |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
| Synovus |
12.8% |
(24%) |
(13%) |
|
BB&T |
12.1% |
5% |
10% |
|
Marshall & Ilsley |
11.0% |
(8%) |
(6%) |
|
Zions Bancorp |
15.5% |
(3%) |
(1%) |
Source: Capital IQ, a division of Standard & Poor's.
It's a difficult time for many regional banks, though Synovus seems to be struggling more than many of its peers. So long as its non-performing loan rate continues its decline, the bank's capital levels are in line with what's considered normal.
3. Management
CEO Richard Anthony has been at the job since 2005.
4. Business
Commercial banking is (or should be) a fairly straightforward business. It's not particularly susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Synovus, we've learned that although the company has tenured management and normal capital levels, it doesn't particularly exhibit the characteristics of a quintessential Buffett investment: consistent earnings power and high returns on equity.
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