Warren Buffett, the CEO of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), is a master at identifying undervalued stocks that can deliver consistent returns for decades. Moreover, he has built a legendary track record of beating the market since he became the leader of the diversified holding company in 1965.
One of his favorite stocks is Bank of America (BAC -0.21%), which is the second-largest bank in the U.S. by assets, a top four U.S. credit card issuer, and the second-largest holding in Berkshire's diverse stock portfolio. Here are four reasons why this top Buffett holding is a no-brainer buy in September.
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4 reasons to buy this bank stock
First, Bank of America enjoys a strong competitive advantage due to its massive scale and presence in various segments of the global financial sector. The bank serves more than 68 million customers through its network of over 3,900 retail branches and 15,000 ATMs nationwide. It also boasts a leading position in digital banking, with more than 56 million verified digital users. In addition, Bank of America has a premier brokerage and advisory business thanks to its acquisition of Merrill Lynch in 2008.
Second, Bank of America has a robust balance sheet and a prudent risk management strategy. The bank had $374 billion in cash and cash equivalents at the end of the last quarter, which exceeded its long-term debt of $286 billion. The bank has also increased its cash position by a remarkable 88% over the past year, in response to the uncertainty and volatility in the U.S. financial system. As a Tier 1 bank, Bank of America is well prepared to withstand any potential shocks or liquidity crises.
Third, Bank of America rewards its shareholders with an attractive dividend and share buyback program. The bank currently pays an annualized dividend of 3.41%, which is significantly higher than the average yield of 1.5% for the S&P 500 index. However, Bank of America's dividend yield is slightly below its peer group average of 3.67%, mainly because of Citigroup's extraordinarily high yield of 5.06% at current levels. The bank also repurchased about $500 million worth of its shares in the second quarter of 2023, demonstrating its confidence in its future prospects.
Fourth, Bank of America's stock price has dropped by over 14.6% year to date. As a result, its shares are now trading at 8.4 times projected earnings. This is not the lowest valuation among the Big 4 U.S. banks, but it is still an attractive multiple for a large-cap stock with a generous shareholder rewards program, a solid balance sheet, and a wide economic moat.
Key takeaway
Bank of America stock is an excellent choice for investors looking for a high-quality Warren Buffett stock to buy this month. The bank has a dominant position in the U.S. banking industry, a resilient financial performance, and a shareholder-friendly capital allocation policy. It should also be able to sail through this latest bout of volatility in the financial sector without any major problems.
