Bank of America (BAC) stock has been one of the better bets among large-cap financials in the past few years – but as a long-term holding, it leaves everything to be desired.
True, shares in the nation's second biggest bank by assets generated an annualized total return (price change plus dividends) of more than 25% over the past year. That beats the broader market by more than a couple of percentage points.
And it's not for nothing that BAC remains one of Warren Buffett's favorite stocks. Berkshire Hathaway initiated a position in BAC in the third quarter of 2017. While Buffett has exited stakes in a host of other financial names through the years, BAC is still Berkshire's third-largest holding.
BAC accounts for more than 10% of the value of Berkshire's U.S. equity portfolio. Meanwhile, with more than 8% of its shares outstanding, Berkshire is Bank of America's second-largest investor after Vanguard.
It's hard not to like a stock so beloved by Warren Buffett, especially when he's gone out of his way to praise the bank's management.
Wall Street likes BAC, too. Of the 26 analysts covering the stock surveyed by S&P Global Market Intelligence, 15 rate it at Strong Buy, seven say Buy and four have it at Hold. That works out to a consensus recommendation of Buy, with very high conviction.
"We look for lending revenues to continue to improve amid better loan growth and an expanding net interest margin from a steeper yield curve," writes Argus Research analyst Stephen Biggar, who rates the financial stock at Buy. "Investment banking is also expected to continue its rebound."
As bright as BAC's prospects might be, shares have been a truly dreadful buy-and-hold bet.
Blame the Great Recession
Bank of America was formed when NationsBank acquired BankAmerica in the late 1990s to create the country's first coast-to-coast bank. The firm followed up with other megadeals, such as scooping up FleetBoston Financial, MBNA and U.S. Trust.
Sadly, the bank's hunger for deals was ultimately its undoing.
When the housing market imploded and the Great Recession hit, Bank of America went shopping. The firm's acquisition (with government assistance) of Merrill Lynch worked out. Its purchase of Countrywide, then the nation's largest mortgage lender, did not.
With a deal price of about $4 billion in stock, Countrywide looked like a fire-sale bargain. Instead, it saddled BAC with hundreds of billions of dollars in bad loans and tens of billions of dollars in legal settlements.
A stock that traded north of $50 in 2007 went for less than $5 in March 2009. More than four years later, BAC stock was still below $15. That made shares essentially immaterial among the price-weighted Dow Jones stocks. In the fall of 2013, BAC was replaced in the blue-chip barometer by Goldman Sachs (GS).
The bottom line on Bank of America stock
Bank of America has been a terrible buy-and-hold bet. In its entire life as a publicly traded company, BAC has generated an annualized total return of just 4%. The S&P 500, by comparison, returned 10.7% over the same span.
Shares also lag the broader market over the past three-, five-, 10- and 15-year periods.
As for the past two decades? It's sort of unforgivable.
Have a look at the above chart, and you'll see that if you invested $1,000 in BAC stock 20 years ago, today your stake would be worth about $1,600 – good for an annualized total return of 2.4%.
The same amount invested in the S&P 500 would theoretically be worth almost $7,800 today, or an annualized total return of almost 10.8%.
Past performance is not a guarantee of future results. Let us pray we never see something like the Great Recession again.
If nothing else, BAC's 20-year return shows how the damage inflicted by the global crisis continues to haunt investors to this day.
