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 Citigroup
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 Citigroup 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 Citigroup's earnings history:
Source: S&P Capital IQ.
Over the past five years, Citigroup's earnings have fluctuated dramatically amid the financial crisis. Earnings have recovered somewhat, but as with many other U.S. banks, loan growth -- which declined 11% last quarter -- remains sluggish.
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. For U.S. banks, leverage of about 10 times is normal.
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 |
Leverage Ratio |
Return on Equity |
5-Year Average Return on Equity |
|---|---|---|---|
| Citigroup | 10.8 times | 7% | 0% |
|
Bank of America |
9.6 times | (1%) | 7% |
|
JPMorgan Chase |
12.6 times | 11% | 9% |
|
Wells Fargo |
9.4 times | 12% | 13% |
Source: S&P Capital IQ.
Citigroup seems to be generating modest returns on equity while employing an ordinary amount of debt.
3. Management
CEO Vikram Pandit has been at the job since 2007. Before that, he'd worked at Morgan Stanley for a number of years before founding a hedge fund that Citi acquired.
4. Business
Banking isn't particularly susceptible to technological disruption, though it's obviously susceptible to booms, busts, and general craziness.
The Foolish conclusion
Regardless of whether Buffett would ever buy Citigroup (he's already invested in competitors Goldman Sachs and Bank of America), we've learned that, while the company has tenured management, it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt. That being said, if you'd like to stay-up-to speed on Citigroup's progress, or that of any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
