Bank of America (BAC 1.16%) is one of the largest holdings in the portfolio of the legendary investor Warren Buffett. Given Buffett's excellent track record as an investor, one might be inclined to follow his lead and purchase shares of the financial institution, especially considering Bank of America's stock is up by 96% over the past five years, which compares favorably to the S&P 500's 55% return over the same period.
However, before making any definitive decisions, it would be helpful to take a closer look at Bank of America's business and figure out whether its shares are worth buying today.
Performing well despite challenges
Bank of America is one of the largest banks in the U.S. by almost any metric, including assets, market cap, and deposits. The company's biggest segment by revenue is its consumer banking business -- which provides everyday banking needs to individuals and small businesses. Bank of America's consumer banking segment performed well during the third quarter of 2019; its revenue increase by 3%, while its net income grew by 5%. Further, consumer banking deposits grew by 3%, while loans grew by 7%.
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Beyond consumer banking, the company's investment banking services segment -- dubbed global banking -- saw increases in its revenue and net income during the third quarter, as did Bank of America's global wealth and management segment. Overall, the financial institution delivered a solid quarter, with its revenue of $22.8 billion -- and its net income of $5.8 billion -- both coming ahead of consensus analyst estimates. It is worth noting that Bank of America's net income would have been $7.5 billion had it not been for a one-time impairment charge of $2.1 billion related to the company ending its joint venture with First Data. The company's ability to perform well despite the current environment marked by decreasing interest rates is commendable.
Bank of America has done an admirable job of lowering its expenses in recent years, most notably by decreasing its number of employees, closing branches, and relying increasingly on technology. The company's efficiency ratio has improved accordingly. The efficiency ratio measures how well a bank is managing its operating costs and is calculated by dividing noninterest expenses by the bank's net income (50% is optimum). A lower efficiency ratio is better since it means the bank in question is using lower costs to generate income. Bank of America's efficiency ratio improved from 69.6% in 2015 to 58.5% at the end of last year.
Lastly, Bank of America is currently attractively valued, trading at just 12 times past and 11 times future earnings, while its price-to-book ratio is 1.30. The banking giant currently offers a dividend yield of 2.06%, and it has raised its quarterly dividend by 260% over the past five years. With a payout ratio well below 30%, the company is likely to continue raising its dividend.
Reasons to worry
One of the biggest challenges Bank of America is facing right now is that the U.S. Federal Open Markets Committee (FOMC) recently cut interest rates for the third time this year. This is generally bad news for the banking sector, as it means most banks are likely to earn less revenue on loans they make, all other things remaining equal. Also, there has been a lot of talk about a potential coming recession for much of the year, and banks tend to perform relatively poorly during recessions. Of course, no one knows for sure when the next recession will come, but with an inverted yield curve rearing its ugly head for a short time earlier this year, many have been predicting that an economic downturn is imminent.
Finally, other factors that add to global economic uncertainty -- such as the trade war between the U.S and China -- aren't helping, either. Despite all these obstacles though, Bank of America has performed well this year: Its shares are up 43.5% since the start of the year.
Is it a buy?
In my view, Bank of America is a buy for investors focused on the long term. The company may run into some trouble if the economy slows down significantly, but it will probably come out of these troubles -- perhaps bruised and battered -- but in one piece nonetheless. In the meantime, investors can purchase its shares while it is attractively valued, and profit from its strong and growing dividends.
