Bank of America might not be the most exciting stock on Wall Street, but if you want to make money over the long run — and believe in the bets made by the Oracle of Omaha himself, famed billionaire Warren Buffett — then it might be just what you’re looking for. Here’s a quick rundown on why many analysts and investors alike are backing the second-largest bank in the United States.
Bank of America’s current price-earnings ratio is 14.44x, right on track with its estimated forward P/E ratio of 14.23. The P/E for the S&P 500 index as a whole is 30.72, according to The Wall Street Journal. While bank stocks are not high-flyers that command excessive P/E ratios, this puts Bank of America stock at a significant discount to the forward S&P 500 P/E ratio. With fortunes seemingly changing in favor of the bank, this could be an attractive level for purchase for long-term value investors.
If you’re looking for a stock that pays a solid dividend, Bank of America should catch your attention. As of Oct. 12, the S&P 500 index was yielding 1.75%, but Bank of America currently pays a 1.95% yield. That may not seem like much, but in today’s low-dividend world, it equates to an 11% increase over the S&P 500’s yield.
The company struggled during the financial crisis of 2007-08, and it ultimately had to cut its quarterly dividend to just $0.01 per share for its March 27, 2009, payout. However, since then the dividend has grown by a factor of 21, to $0.21 per share every quarter.
Catalysts for Growth
After years of enduring a low-interest rate environment, the coronavirus pandemic hit the economy in 2020. This one-two punch decimated Bank of America’s loan business, which is the primary way in which banks make money.
Traditionally, the function of a bank is to take the money deposited by customers and lend it out to borrowers. Banks earn money on the spread between the low interest rates they pay depositors and the higher rates they collect from borrowers. But in a low-interest rate environment, there’s not much of a spread between short- and long-term interest rates. Coupled with the pandemic shutting down most businesses, loan activity simultaneously dried up, making for a disastrous scenario for banks.
The good news for Bank of America is that things are slowly returning to normal. Thanks to widespread vaccine distribution, more and more cities and towns are opening up, meaning businesses will need capital once again. In fact, in its third-quarter 2021 earnings release, the bank reported a $14 billion increase in average loan and lease balances in its business segments compared to the previous quarter.
Consumers and businesses alike have been flooded with government stimulus money, and this has already been driving longer-term interest rates higher. This heightened demand has already been driving longer-term interest rates higher. Meanwhile, the Federal Reserve has committed to keeping short-term interest rates low for the foreseeable future. Put it all together and Bank of America now has some major catalysts behind it.
What’s Warren Buffett’s Take?
Warren Buffett is one of the most successful investors of all time. The CEO of Berkshire Hathaway, Buffett’s investment vehicle, has a net worth of $102.2 billion and currently sits as the ninth-wealthiest person in the world, according to Forbes’ Real-Time Billionaires list. Buffett’s annual letter to the shareholders of his company is an almost religious experience, popular among professionals and amateurs alike due to his history of investment success and his ability to explain complicated financial matters in simple, folksy terms. The bottom line is this — when Buffett talks, people listen.
Of course, sometimes the best endorsement Buffett can give a stock is in his trading activity. Bank of America certainly seems to have the green light from Buffett, as it’s Berkshire Hathaway’s largest bank investment by far. In fact, it’s currently Buffett’s largest holding overall, with over 1 billion shares owned at a current value of about $46 billion, according to the company’s Aug. 16 13F filing, as analyzed by CNBC.
Good To Know
Perhaps the greatest evidence of Buffett’s fondness for Bank of America was demonstrated in 2020, when Buffett sold shares in numerous other financial holdings while bolstering his Bank of America investment. His purchases of Bank of America stock from July 31 to Aug. 4 increased his stake to nearly 12% of the entire company. And, in true Buffett fashion, those purchases have already proven to be big winners, as Bank of America traded at about $25 per share at the time, marking a 58% gain as of Oct. 13, 2021.
So, Is Bank of America Stock a Good Buy?
While investors would no doubt like to have bought Bank of America stock back when Buffett was loading up in midsummer 2020, the stock still appears to have some room left to run. Bank of America’s above-average dividend yield and good valuation already make it worth taking a look at, but additional factors seem to be supporting the long-term growth of the company’s share price. America’s slow recovery from the coronavirus pandemic should continue to unleash both consumer and business spending, and a growing economy typically leads to increased loan activity. Additionally, interest rate spreads are likely to increase in this scenario, which is another catalyst for banks as a whole.
To top it all off, one of the most successful investors in the world owns 12% of the outstanding shares of Bank of America, meaning those who buy the stock now are in good company. Just be sure to talk with your investment advisor to ensure that a purchase of Bank of America shares matches your own personal investment objectives and risk tolerance.
Daria Uhlig contributed to the reporting for this article.
Data is accurate as of Oct. 14, 2021, unless otherwise noted, and subject to change.