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.
While we can't know for sure whether Buffett is about to buy Kimberly-Clark
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 Kimberly-Clark 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 Kimberly-Clark'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 recent years, Kimberly-Clark's earnings and free cash flow have held relatively consistent.
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 among 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) |
|---|---|---|---|
| Kimberly-Clark | 128% | 33% | 31% |
|
Procter & Gamble |
47% | 18% | 17% |
|
Wausau Paper |
54% | 12% | 5% |
|
Energizer Holdings |
102% | 14% | 46% |
Source: Capital IQ, a division of Standard & Poor's.
Kimberly-Clark tends to generate high returns on equity while employing moderately high amounts of debt.
3. Management
CEO Thomas Falk has been at the job since 2002, and he's served in other roles with the company for many years.
4. Business
The paper industry may have been undergoing rapid technological change early in the 20th century, but today personal-care and paper products aren't particularly susceptible to technological disruption.
The Foolish conclusion
Whether Buffett would ever invest in Kimberly-Clark, we've learned that it exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings, tenured management, and a straightforward industry.
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