Bank of America (BAC +1.10%) is one of the largest financial institutions in the world. And this makes it critical to the smooth flow of capital and functioning of our economy. Consequently, Bank of America looks to be one of the most durable businesses around.
Legendary investor Warren Buffett likely agrees. And that's perhaps why Berkshire Hathaway owns 568 million outstanding shares of Bank of America. Retail investors might want to take a closer look at this business.
If you buy this top bank stock right now, will you be set up for life?
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The momentum isn't letting up
This year has been anything but smooth sailing for investors. Ongoing trade uncertainty, geopolitical tension, fears about an artificial intelligence bubble, and constant anticipation of what the Federal Reserve will do has gotten most of the attention. This has created a shaky economic environment.
However, Bank of America continues to benefit from strong momentum. During the third quarter (ended Sept. 30), its revenue (net of interest expense) climbed 11% year over year to $28.1 billion. This was driven by strong investment banking activity.
One obvious advantage that Bank of America has versus smaller banking entities is its diversified business model. It has its hands in virtually all areas of the financial services industry. This favorable setup can help offset weakness in one segment with strength in another.
Looking ahead, the company is in a position to see loan growth pick up. The Federal Reserve has started to cut its benchmark interest rate. If more cuts are on the horizon, it can help lower borrowing costs across the economy. This can support higher demand for loans, leading to more revenue for Bank of America.
Bank of America has a wide economic moat
To go back to Warren Buffett's view, it's easy to believe that Bank of America will still be a dominant force in banking decades from now. That staying power can be especially compelling for long-term investors looking to park their capital in a company without needing to worry about its industry position deteriorating for whatever reason.
Bank of America possesses a wide economic moat. For starters, it has a widely recognized brand name, which its retail customers and corporate clients have come to trust with their money. Getting to this position doesn't happen overnight.
With its tremendous scale, Bank of America likely also has a cost advantage. It can better leverage its expenses since it has a larger revenue base. And it has the resources to invest heavily in tech and digital initiatives that can impact the entire business.
And finally, like other large banks, Bank of America benefits from switching costs. In an effort to avoid the headache of changing a financial services provider, customers will be inclined to stay put. There is lock-in here.
NYSE: BAC
Key Data Points
Can the stock generate monster returns?
When looking to buy a stock that can set them up for life, investors typically want to score monster returns over decades. This could mean a 20-fold, 50-fold, or even a 100-fold gain. These are huge numbers that can certainly be life-changing, turning seemingly small sums of money into massive amounts.
However, Bank of America doesn't fall into this category. It's a mature financial institution, so investors should not expect outsized revenue and profit growth over the long term. That's the right view to have, as there is limited room for meaningful expansion when you're well-established and already everywhere.
In the past decade, shares have generated a total return that slightly lags the overall S&P 500 (as of Nov. 20). It wouldn't be surprising to see underperformance continue.
