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 Regions Financial
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 Financial 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 Financial'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, Regions Financial's earnings have shrunk considerably, in large part because of declining interest income and increased provisions for loan losses.
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 10 to 12 times is considered normal.
|
Company |
Leverage Ratio |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
|
Regions Financial |
7.8 |
1% |
(5%) |
|
Zions Bancorp |
7.4 |
0% |
(1%) |
|
Fifth Third Bancorp |
8.8 |
9% |
3% |
|
First Horizon National |
9.3 |
4% |
(1%) |
Source: Capital IQ, a division of Standard & Poor's.
Like many of its peers, Regions has tended to generate fairly low returns on equity. For a commercial bank, it has a moderately low debt-to-equity ratio.
3. Management
CEO O. B. Grayson Hall has been at the job since 2010. Prior to that, he was the company's COO and worked at AmSouth Bancorp for several years.
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
Regardless of whether Buffett would buy shares of Regions Financial, we've learned that, while the company operates in an industry with which Buffett tends to feel comfortable, it doesn't exhibit some of the other quintessential characteristics of a Buffett investment: consistent earnings and high returns on equity with limited debt.
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