Berkshire Hathaway (NYSE:BRK-B) filed its highly anticipated quarterly stock-holdings report with the SEC this week. One clear conclusion from the report: Warren Buffett likes his banks.
The Berkshire CEO raised its holding of Wells Fargo (NYSE:WFC), the largest bank by market value and the fourth-largest by assets, by 4% in the first quarter. The average closing price of the stock during the first quarter was $35.63; on Thursday, the stock closed at $39.26.
In fact, Berkshire has now increased the size of its Wells Fargo stake in 10 of the past 11 quarters. The bank is one of Berkshire's "Big Four" investments, of which Buffett wrote in his most recent annual letter to shareholders:
The earnings that the four companies retain are often used for repurchases -- which enhance our share of future earnings -- and also for funding business opportunities that are usually advantageous. Over time we expect substantially greater earnings from these four investees. If we are correct, dividends to Berkshire will increase and, even more important, so will our unrealized capital gains (which, for the four, totaled $26.7 billion at yearend).
Berkshire also raised its stake in a comparable institution, US Bancorp (NYSE:USB). Like Wells, it is well-run, with a disciplined lending culture; together, they are the two largest U.S. banks by assets that aren't investment banks or universal banks (such as JPMorgan Chase or Bank of America).
With Wells Fargo and US Bancorp shares trading at 1.78 and 2.59 times their respective tangible book values, they're definitely at the high end of their peer group on that metric. However, on the basis of earnings multiples, the valuations look eminently reasonable, with both at roughly 11 times the estimates of the next 12 months' earnings per share. They even offer an above-market dividend yield -- Wells' is a rather tasty 3.2%
As the following graph shows, Wells Fargo and US Bancorp shares have smashed the broad market (and their sector) since this bull market began on March 9, 2009:
The stocks' current valuations wouldn't prevent that outperformance from lasting another several years.