The results of the second round of the Federal Reserve's annual Comprehensive Capital Analysis and Review (CCAR) were just released, and the results found that most banks passed. That is -- under a severely adverse economic scenario that consisted of, among other things, a 6-percentage-point rise in the unemployment rate, a 50% drop in stocks, a 25% drop in home values, and recessions in several international economies -- our largest banks would remain adequately capitalized.
This is excellent news for Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), as a large portion of its $205 billion stock portfolio is made up of bank stocks that were subject to the stress tests.
Specifically, all of the big banks Berkshire Hathaway owns in its portfolio received no objections to their capital plans from the Fed. This clears the way for dividend increases and share buybacks, and the banks certainly didn't disappoint. Here's how the latest stress test results affected Berkshire's bank stocks and what it means for the company.
Image source: The Motley Fool.
How the stress tests impact Berkshire Hathaway
Of the 18 banks subject to this year's stress tests, seven are in Berkshire's portfolio. Here's a rundown of how much each increased its dividend by and what it means to Berkshire's dividend income stream.
|
Company |
Number of Shares |
Dividend Increase Per Share (Quarterly) |
Increase in Berkshire's Income |
|---|---|---|---|
|
Bank of America (BAC 0.07%) |
896,167,600 |
$0.03 |
$26.89 million |
|
Wells Fargo (WFC 5.70%) |
409,803,773 |
$0.06 |
$24.59 million |
|
Goldman Sachs (GS +2.12%) |
18,353,635 |
$0.40 |
$7.34 million |
|
U.S. Bancorp (USB 0.74%) |
129,308,831 |
$0.05 |
$6.47 million |
|
JPMorgan Chase (JPM 0.82%) |
59,514,932 |
$0.10 |
$5.95 million |
|
PNC Financial (PNC 0.17%) |
8,671,054 |
$0.20 |
$1.73 million |
|
Bank of New York Mellon (BK +0.98%) |
80,937,250 |
$0.03 |
$2.43 million |
|
Total |
$75.4 million (quarterly), $301.6 million (annually) |
Data source: Company press releases, Berkshire Hathaway SEC filings (Holdings as of March 31, 2019), and author's own calculations. Numbers may not add perfectly due to rounding.
So, Berkshire is going to get more than $300 million in additional dividend income per year because of the positive stress test results.
Warren Buffett is probably more excited about this part
In addition to the dividends, most of the banks involved in the stress tests also announced increases to their stock buyback plans. And several of Berkshire's bank stocks revealed some pretty impressive numbers:
- Bank of America authorized $30 billion in buybacks over the 12-month period from July 2019 through June 2020, a $10 billion increase from last year.
- JPMorgan Chase authorized a $29.4 billion buyback plan, an increase of $8.7 billion.
- Wells Fargo announced up to $23.1 billion in buybacks. This is actually a small decrease from the $24.5 billion authorized last year.
- Goldman Sachs increased its buyback authorization to $7 billion this year from $5 billion a year ago.
- PNC Financial authorized $4.3 billion in buybacks, more than double the $2 billion it authorized last year.
- U.S. Bancorp will buy back as much as $3.0 billion over the coming year, the same as last year's
- Bank of New York Mellon is increasing its buyback authorization by 20% to $3.94 billion.
Buffett has been adding bank stocks to Berkshire's portfolio at an aggressive pace in recent quarters, which indicates that he sees a lot of value in the industry. Since Buffett loves buybacks when a stock is trading for less than its intrinsic value, it's possible that the Oracle of Omaha could be even more excited about his bank stocks' buybacks than their dividend increases.
The bottom line is that Berkshire gets a double dose of good news. Its annual dividend income is increasing by about $300 million, which can then be used toward further stock purchases or acquisitions. And these companies that Buffett generally considers to be undervalued are planning to buy back stock at an aggressive pace. In short, it's a good day to be a bank investor.
