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 BB&T
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 BB&T 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 BB&T's earnings history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, BB&T's earnings have shrunk somewhat, in large part due to increased provisions for loan losses. Despite the financial crisis and economic downturn, however, the company managed to remain profitable.
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. I'll be using a leverage ratio defined as assets divided by equity, which is more appropriate for banks. In the United States, about 9 to 12 times is considered normal.
|
Company |
Leverage Ratio |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
|
BB&T |
9.3 |
6% |
10% |
|
KeyCorp |
9.1 |
10% |
2% |
|
Synovus Financial |
9.9 |
(15%) |
(13%) |
|
SunTrust Banks |
8.8 |
3% |
4% |
Source: Capital IQ, a division of Standard & Poor's.
Like many of its peers, BB&T has tended to generate moderately low returns on equity over the past few years. For a commercial bank, it has a pretty normal leverage ratio.
3. Management
CEO Kelly King has been at the job since 2008. Prior to that, he worked at BB&T for nearly three decades and held a number of jobs, including COO.
4. Business
The banking industry isn't particularly susceptible to technological disruption, but it can be susceptible to the risk that goes along with mind-blowing complexity and opacity.
The Foolish conclusion
Whether or not Buffett would buy shares of BB&T, we've learned that while the company generates only somewhat consistent earnings and reasonable returns on equity, it does exhibit some of the other quintessential characteristics of a Buffett investment: tenured management and a straightforward industry.
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