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 Visa
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 Visa 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 Visa's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past five years, Visa's earnings have grown considerably.
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.
Return on Equity
5-Year Average Return on Equity
|American Express ||367%||28%||28%|
|Discover Financial Services ||223%||29%||17%|
Source: S&P Capital IQ.
Visa generates reasonable, though below peer-average, returns on equity without employing any debt.
CEO Joe Saunders has been at the job since 2007. Before that, he'd worked in card services at companies like WaMu and Bank of America.
Buffett's a big fan of the card industry. He's held shares of American Express for years, and his company recently opened a position in MasterCard, though Buffett himself may not have made the investment.
The Foolish conclusion
Regardless of whether Buffett would ever buy Visa, we've learned that, while Buffett might prefer to see slightly higher returns on equity, it does exhibit many of the other characteristics of a quintessential Buffett investment: consistent or growing earnings, limited or no debt, and tenured management. If you'd like to stay up to speed on Visa'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.
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