Commonwealth Bank of Australia (ASX: CBA) shares might fit well into Warren Buffett's portfolio but I think he would want a more compelling valuation before buying in.
Why would Buffett buy it?
Currently, Buffett's Berkshire Hathaway holds shares of US-based banking giant, Wells Fargo, as well as US Bancorp, Goldman Sachs, Bank of New York Mellon Corp and more. Basically, he likes owning banks.
The Buffett checklist
According to an interview of Charlie Munger, Buffett's partner in crime at Berkshire Hathaway, the duo look to tick four boxes on prospective investments. Let's run Commbank through the four-part checklist.
- They must be capable of understanding the business.
If you don't understand the business in which you partly own (as a shareholder), you shouldn't own it.
As the owner of 16.5% of all shares in Wells Fargo — worth the equivalent of 38% of Commbank — and numerous other banks, I think Buffett could wrap his head around Commbank's business and understand it very well.
It ticks this box.
- The business must have a durable competitive advantage.
As Australia's largest and most dominant bank, having made significant investments in technology, Commbank has an advantage over its peers like Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ). I'm not sure it is a durable advantage, but it has worked so far.
It ticks this box, too.
- Management must have integrity and talent.
Ian Narev is CEO of Commbank, having been in the role since late 2011. Although it is a crude measure, the bank's share price is up 71%, paying out larger dividends while maintaining its commanding stakes in deposits and mortgages.
Narev is backed up by many other highly experienced bankers.
It gets a tick for this one.
- The valuation must make sense.
This is where Commbank falls down, in my opinion. Buffett is known for buying wonderful businesses at good prices. Generally, this happens only when the world's financial markets are a mess and panic runs rife.
At today's prices, I do not think Buffett would be in a rush to buy Commbank shares. As I showed here, they are not at bargain prices. For that reason, although Commbank is likely a Buffett-type company, I doubt he would buy shares in it today.
