Bank of America is Warren Buffett's largest bank stock investment by a wide margin. As of the latest available information, Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) owns over 1 billion shares of the bank worth about $32 billion, which translates to a stake of just under 12%.
What's more, Berkshire was building its Bank of America stake in 2020 while simultaneously selling other banks. In 2020, Buffett sold shares of nine different financial stocks, including big sales of JPMorgan Chase, Wells Fargo (WFC 2.73%), and Goldman Sachs (GS -0.20%). This begs the question, "Why Bank of America?"
While we don't know exactly why Buffett is apparently much more confident in Bank of America than other banks, we do know quite a bit about Buffett's investing style that could shed some light on why the Oracle of Omaha might see so much promise in BofA.
Image source: The Motley Fool.
Why does Buffett like Bank of America so much?
For one thing, we know Buffett is a big fan of Bank of America's management, particularly CEO Brian Moynihan. Since the financial crisis, Bank of America has transformed itself into a top-notch financial institution. With Moynihan at the helm, it's become far more efficient, more responsible in its lending operations, and more diversified. It's difficult to overstate the value Buffett places on good management, so I'd be shocked if this didn't play a major role in the decision to invest so heavily.
Furthermore, Bank of America is a relatively cheap bank stock compared to its profitability. The stock trades at just 1.09 times book value. For reference, JPMorgan Chase trades for a P/B multiple of 1.65. Now, 2020 was a strange year in banking, and increased reserve builds threw off profitability metrics. But here's how this valuation compares to each bank's pre-pandemic returns on equity.
|
Bank |
FY 2019 Return on Equity (ROE) |
Price-to-Book Multiple |
ROE/Price-to-Book |
|---|---|---|---|
|
Bank of America (BAC 1.53%) |
10.6% |
1.09 |
9.72 |
|
JPMorgan Chase (JPM 0.65%) |
14% |
1.65 |
8.48 |
Data source: Company earnings reports and YCharts. Price-to-book multiples as of 2/3/21. Note that ROE/Price-to-book isn't any official metric, but is simply a way to compare profitability to valuation in a single number.
In simple terms, Bank of America has produced greater profitability for the price. JPMorgan Chase is a more profitable bank (and I expect that to continue post-pandemic), but this profitability comes at a hefty premium. What's more, Buffett's purchases were all made when the stock was trading for less than book value, and we know how Buffett loves a margin of safety.
In addition to its profitability, Bank of America is a well-capitalized financial institution, pays an attractive 2.3% dividend yield, and has been aggressively buying back its own stock (except in 2020, when banks weren't allowed to do so). Plus, it has grown its deposit and loan portfolios faster than most big-bank peers in recent years.
Finally, the bank's efficiency has improved dramatically because of its willingness to invest in technology. Bank of America has won several awards for its online and mobile functionality, and this focus will give the bank a long-term competitive advantage over some of its less tech-focused big bank rivals.
Should you invest alongside Buffett?
To be clear, it's not necessarily a great idea to buy any stock just because a billionaire did, even if that billionaire is Warren Buffett. However, Bank of America does look like an excellent long-term value investment right now. It's cheap, it's a technology leader, and its management team is doing a fantastic job. In fact, I wouldn't be at all surprised to see Buffett buy even more.
