Would Warren Buffett Buy Great Eastern Holdings?

great eastern logoIf longevity and durability are signs of a good business, then Great Eastern (SGX: G07) should be up there with the best of Singapore’s long-lasting companies.

Great Eastern, which was founded in 1908 by Canadian AH Fair, is only a handful of Singapore outfits that have been around for 100 years or more. But does Great Eastern have what it takes to be a Warren Buffett stock?

Buffett is looking for companies with low earnings volatility. Over the last 10 years Net Income at Great Eastern has increased around 8% a year. However, the improvement has been noticeably lumpy, though, as a result of gains and losses made on its investments.

Warren Buffett is also looking for businesses that command a high margin. Great Eastern’s Net Income is not especially high. At around 6%, it is below the average for the 30 companies that comprise the Straits Times Index (SGX: ^STI). That said, its Net Income Margins are relatively stable and rarely dip below 5%.

The company is not massively efficient. It generates S$0.17 of revenue for every dollar of asset employed in the business. That said, its Asset Turnover is roughly in line with insurance peer Prudential (SGX: K6S). It is also a good bit higher than consumer finance company Hong Leong Finance (SGX: S41).

In terms of volatility, the shares aren’t at all volatile. The volatility of 15% is slightly lower than the market average, which could suggest a low exposure to macroeconomic risk.

Interestingly, the company is quite good at delivering a decent return to investors. Over the last ten years, the Return on Equity has averaged 15%, while the Return on Capital averages 17%. Those impressive returns might just swing it for Warren Buffett stock.

Buffett’s partner, Charlie Munger, once said: “If a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.

Munger might be right. Over the last 14 years, shares in Great Eastern have more than quadrupled from a dividend-adjusted price of S$4.23 to S$19.60. That equates to an annual total return of 11.6%, which is not at all disappointing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.