Warren Buffett, the CEO and Chairman of Berkshire Hathaway (BRK.B), doesn't require much in the way of formal introduction. Frequently hailed as one of the greatest investors of all time, the “Oracle of Omaha” has amassed a cult-like following over the years.
Naturally, details about the specific makeup of Buffett's stock portfolio are an ongoing matter of interest for the wider investment community - and for a while now, Apple (AAPL) has somewhat famously been the largest of Berkshire's equity holdings, accounting for just under 50% of the portfolio. Equally well-documented, perhaps, is Buffett's long-term entanglement with “Dividend King” Coca-Cola (KO), officially the No. 4 stock in his portfolio.
Here, though, we'll take a closer look at another blue-chip name that's earned a major vote of confidence from Buffett - and in fact, it's the No. 2 stock in Berkshire's portfolio.
About Bank of America
Founded in 1929, Charlotte-based Bank of America (BAC) has gone on to become the second-largest bank in the U.S. by assets. It offers a wide range of financial products and services, including banking, investment banking, insurance, and wealth management. With a mammoth market cap of $243.9 billion, Bank of America is also the second-largest bank in the world by market capitalization.
Buffett, through Berkshire Hathaway, holds a 13% stake in BAC worth about $31 billion, which accounts for roughly 8.7% of its equity portfolio.
Against a remarkably unfavorable macroeconomic backdrop for lenders this year, Bank of America stock is down 8% on a YTD basis to lag the broader market, as well as the S&P 500 Financial Sector SPDR (XLF), up about 5%.
Following its lackluster 2023 performance, Bank of America stock is trading at reasonable levels. The shares are priced at 9x forward EPS and 0.94x book, both of which are a discount to the sector median for financial stocks.
Notably, the stock also offers a healthy dividend yield of 3%, and the company has been raising dividends consecutively for the past 10 years. BAC's payout ratio is low, at 23%, indicating there's room for the bank to keep raising its dividend (with the blessing of the Fed's stress tests).
BAC Beats on EPS Again
Results for the latest quarter were solid, as the bank beat expectations on both earnings and revenue. Total revenues increased by 3% from the previous year to $25.2 billion, driven by 4.5% yearly growth in net interest income. EPS rose by 11.1% from the prior year to $0.90, comfortably outpacing the consensus estimate of $0.83. In fact, BAC has reported stronger-than-forecast EPS in each of the past five quarters.
Credit losses were also narrower than expected, arriving at $1.2 billion. However, unrealized losses ramped up to $131 billion, largely due to BAC's portfolio of low-yielding, hold-to-maturity assets. At the end of the quarter, the hold-to-maturity book stood at $600 billion, consisting of about $122 billion in Treasuries, and about $474 million in mortgage-backed securities.
How Bank of America Could Benefit from Rate Cuts
BAC seems more likely than most other big banks to benefit from expected rate cuts in 2024. Analysts have called the held-to-maturity portfolio a “thorn in the side” of the stock, and a gradual shift by the Fed toward more accommodative policy would take some pressure off this bundle of low-yielding assets, even as overall net interest income takes a hit.
Additionally, Bank of America's trading desk has been quietly outperforming in 2023, delivering stronger-than-forecast revenue in consecutive quarters. In fact, sales and trading revenue increased 8% in Q3 to hit a decade high of $4.4 billion. A more favorable macro backdrop for interest rates should further support this business segment, as equity volumes and M&A look set to ramp back up heading into 2024.
What Do Analysts Expect from Bank of America?
Analysts remain optimistic about Bank of America stock, and have deemed it a “Moderate Buy” with a mean target price of $34.63. This denotes an upside potential of about 13% from current levels.
Out of 20 analysts covering the stock, eight have a “Strong Buy,” one has a “Moderate Buy,” 10 have a “Hold” rating, and one has a “Strong Sell” rating.
