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 Total
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 Total 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 Total's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Total's earnings have fluctuated somewhat, though the company has managed to remain consistently profitable every year for over two decades.
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 |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
|
Total |
28% |
26% |
23% |
|
ConocoPhillips |
39% |
17% |
8% |
|
ExxonMobil |
10% |
25% |
30% |
|
Chevron |
10% |
21% |
22% |
Source: Capital IQ, a division of Standard & Poor's.
Total tends to generate high returns on equity while employing modest amounts of debt.
3. Management
CEO Christophe de Margerie has been at the job since 2007. He's held various other jobs at the company as far back as 1974.
4. Business
Integrated oil and gas companies aren't particularly susceptible to wholesale technological disruption. In fact, Buffett owns shares of peer ConocoPhillips.
The Foolish conclusion
Whether or not Buffett would buy shares of Total, we've learned that the company exhibits many of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward business.
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