These Charts Will Change Your Mind About This "Expensive" Warren Buffett Stock

Paying a premium price for anything is always tough to stomach. Yet one picture reveals why investors should be willing to pony up for one big bank. Just like Warren Buffett did.

The eye-opening reality
Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , run by Warren Buffett, is often known for its biggest investments. After all, at last count its four biggest stock holdings made up more than 55% of its nearly $120 billion portfolio of investments.

Yet often lost in that is the reality Berkshire also owns more than 5% of US Bancorp (NYSE: USB  ) , worth almost $3.9 billion, making it the 9th largest holding. Yet the investments of Berkshire Hathaway are really divided into tiers, and as shown in the chart below, it is much close to being the fifth than eleventh: 

Source: Company Investor Relations

Far from a value investment
What people assume about Buffett and Berkshire Hathaway is many of the stock purchases are made because they're value investments. After all, Buffett himself once said:

Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down. 

However no one would suggest US Bancorp is a "value" investment. Its price to tangible-book value sits at 3.0, well above the 2.2 value of the other well-known (and enormous) Buffett bank investment, Wells Fargo. In fact it more than doubles the 1.4 P/TBV that JPMorgan Chase trades at.

Buffett actually began adding to his position nearly 10 years ago, when US Bancorp traded at an even more expensive valuation than where it sits today.

All of this is to say it's tough to believe anyone would call US Bancorp "marked down," either then or now.

One critical reality
Yet the truth is, investors should be willing to pay a premium for the bank itself. A recent slide from its annual meeting reveals exactly why it commands such a lofty value: 

Source: Company Investor Relations

As you can see, of the three critical profitability measures of banks, US Bancorp delivers resounding victory not over just the last year, but in fact the last six. All of this is to say, the premium price is certainly justifiable seeing the ability of the bank to deliver returns to its shareholders.

The Foolish bottom line
The sentence before the Buffett quote mentioned earlier said this:

Long ago, Ben Graham taught me that "Price is what you pay; value is what you get."

And the thing to see about US Bancorp is, while it may trade at an expensive price, it truly delivers value.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to discover more about this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2934685, ~/Articles/ArticleHandler.aspx, 8/30/2015 6:35:04 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
BRK-A $205344.00 Up +404.00 +0.20%
Berkshire Hathaway… CAPS Rating: ****
BRK-B $135.74 Down -0.49 -0.36%
Berkshire Hathaway CAPS Rating: *****
USB $42.59 Up +0.01 +0.02%
US Bancorp CAPS Rating: ****