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 AT&T
Writing in a 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 AT&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 AT&T's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past several years, AT&T's earnings and free cash flow have fluctuated a fair bit from its operations.
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 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.
AT&T generates a moderately low return on equity -- 4% over the past year, 9% on average over the past five years -- while employing a moderate 61% debt-to-equity ratio.
CEO Randall Stephenson has been at the job since 2007. Before that, he held various other positions in the company and has been in the industry for decades.
Despite its reputation sometimes as a club for stodgy dividend payers, the telco industry is heavily affected by the rapidly changing handset market; the increasing popularity of the iPhone, for instance, has put the squeeze on carriers' margins by forcing them to subsidize the popular device.
The Foolish conclusion
So is AT&T a Buffett stock? Probably not. Tenured management notwithstanding, the company doesn't particularly exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity, and a straightforward business.
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Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool has a disclosure policy.
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