Warren Buffett-led Berkshire Hathaway owns numerous businesses in its public equities portfolio. While Apple gets a lot of the attention, mainly because it's a large position that has crushed the market in recent years, there's one financial stock that shouldn't fly under the radar.
I'm talking about Bank of America (BAC -1.29%), the massive money-center bank that the Oracle of Omaha has owned since 2007. Its shares have generated a total return of 42% this year (as of Dec. 9).
Should you buy this top Buffett stock before the start of 2025?
A leader in the financial services sector
One of the reasons I'm sure Bank of America sits in Berkshire's portfolio is because it has staying power. Owning companies that are durable is something Buffett appreciates. It's hard to argue that Bank of America doesn't fit this description.
Banks have been around forever. This is due to the essential service they provide for the economy, facilitating the movement of money between savers and borrowers. They also provide different capital markets activities. I don't believe it's a stretch to say that the world will continue needing these things decades from now.
This perspective means that Bank of America isn't going anywhere. Its industry position is supported by a wide economic moat. The business has a recognized brand that customers have come to trust. Plus, its broad reach, particularly with its digital presence and physical brand network, makes it easy to attract low-cost deposits and take advantage of various opportunities to generate revenue.
Bank of America has diversified business lines, spanning consumer and commercial banking to capital markets and asset management, that lessen dependence on any single product or service. And with $3.3 trillion in total assets (as of Sept. 30) and third-quarter net revenue of $25.3 billion, its massive scale is difficult to ignore. The company's ability to leverage its expenses has resulted in consistent profitability, something that shareholders can be happy about.
Pay the right price
Bank of America's stock has had a fantastic year. The market appears to be bullish on the outlook of loan demand picking up as the Federal Reserve has started to lower interest rates. This accommodative monetary stance could provide a boost for the economy, which would help Bank of America.
Based on the positive attributes I've outlined above, coupled with the prospects of a favorable macro backdrop, you're probably ready to rush to buy shares. But investors must also pay attention to valuation.
As of this writing, Bank of America stock trades at a price-to-earnings (P/E) ratio of 16.7. That valuation multiple has climbed a noteworthy 93% just in the past 12 months. At the same time, diluted earnings per share (EPS) declined 10% in the past year. Therefore, it's obvious that the stock has benefited from a huge improvement in market sentiment. As a result, perhaps forward returns will be lower than the recent past.
It's also important to look at longer-term trends. In the past five years, the company's diluted EPS increased at a compound annual rate of just 1.6%. Investors shouldn't expect outsize profit growth from Bank of America, at least for an extended period of time, as this is a very mature enterprise.
Income-seeking investors will like Bank of America's 2.3% dividend yield. And to their credit, executives continue to repurchase outstanding shares. These capital allocation decisions benefit shareholders. However, that's not enough to justify paying a steep valuation for the stock.
I believe this business, one that Warren Buffett is certainly fond of, should at least be on your radar. But in my opinion, the correct move is to wait for a more compelling P/E ratio, maybe around 12, before buying.
