Is CVS a Buffett Stock?

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 CVS (NYSE: CVS  ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing 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 CVS 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 CVS's earnings and free cash flow history:

Source: S&P Capital IQ.

CVS's earnings have been pretty consistent over the past five years.

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.

CVS generates a fairly low return on equity -- 9% last year and 12% on average over the past five years. It carries a debt-to-equity ratio of 29%.

3. Management
CEO Larry Merlo has been at the job for about a year. He's held various other positions at CVS since 1994.

4. Business
The pharmacy business isn't particularly susceptible to technological disruption.
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The Foolish conclusion
So is CVS a Buffett stock? Probably not. Despite its consistent earnings and straightforward industry, the company doesn't particularly exhibit the other quintessential characteristics of a Buffett investment: high returns on equity with limited debt and tenured management. To stay up to speed on CVS's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.