Warren Buffett Has $34.8 Billion Invested in This Dividend Stock. Is It a Smart Buy Now?
It's been 59 years since Warren Buffett acquired Berkshire Hathaway for $14.86 per share. The holding company's A-class stock, which has never split, has been trading for more than $598,000 per share.
Warren Buffett is widely considered one of the greatest investors of all time because Berkshire's stock price has risen at an annual rate of 19.7% for nearly six decades. Applying the rule of 72, that is fast enough to more than double an initial investment every four years.
Buffett made Berkshire Hathaway one of America's largest conglomerates by acquiring and investing in profitable businesses likely to become increasingly profitable over time. These days, the second-largest holding in Berkshire's equity portfolio is Bank of America (NYSE: BAC).
Bank of America was one of just four positions in Berkshire's equity portfolio at the end of 2022 that Buffett added to in 2023. This suggests the legendary investor is fairly confident about its long-term success.
Could Bank of America be a good stock for individual investors to buy and hold as Buffett has? Here's what you should know.
Reasons to buy Bank of America stock
A well-recognized brand and its customers' hesitancy to switch financial institutions are significant advantages for Bank of America. Buffett also knows it's a systemically important financial institution. This means the United States government will step in if the bank is hit with an unforeseen emergency as it did less than 20 years ago.
The odds of Bank of America requiring a bailout are very slim. It finished the first quarter with an 11.8% Tier 1 Capital Ratio, which is a healthy 1.8% above the regulatory minimum.
Bank of America has started offering certificates of deposit (CDs) that pay more than 4%, but its standard savings account still offers a 0.01% interest rate. Despite offering below-average rates on savings deposits, it added about 245,000 new consumer accounts in the first quarter. It was the 21st consecutive quarter with net additions in its consumer banking segment.
In addition to a brand that is popular among consumers, Bank of America benefits from enviable credit ratings that lower its cost of capital relative to smaller banks. An attractive consumer brand and excellent credit ratings helped Bank of America raise its dividend payout by 60% over the past five years. The 2.8% dividend yield the stock offers now is less than thrilling, but it's rising fast enough to produce heaps of dividend income over the long run.
Finally, the bank is trading at a reasonable valuation. At recent prices, you can buy Bank of America stock for about 1.4 times its tangible book value.
Reasons to avoid Bank of America for now
Bank of America relies on its consumer banking segment for more than 40% of its total net income. This could be a problem, because inflation has many American consumers under more pressure than they can handle.
The company has recorded lots of net new customer additions, but they're depositing less cash into low-interest savings accounts. Over the past two years, average savings deposit balances have fallen more than 20% from $72.4 billion in the first quarter of 2022 to $57.4 billion in the first quarter of 2024.
Higher deposit costs lowered first-quarter net investment income by 3% year over year and relief could be a long way off. Federal Reserve Chair Jerome Powell recently lowered the likelihood of upcoming interest rate cuts by expressing a lack of confidence that inflation is under control.
Persistent interest rates won't make it any easier for borrowers to keep up with the loan payments they've been missing. First-quarter net charge-offs shot up 86% year over year to $1.5 billion.
A smart buy now?
Long-term investors are highly likely to come out ahead over the long run, but Bank of America probably isn't the best dividend stock to buy now if you're interested in rapid dividend growth. In light of recent consumer credit trends, earnings growth could be extra challenging over the next few years.
The charge-off rate on credit card loans across America's 100 largest banks reached 3.96% in the fourth quarter of 2023. That's higher than it's been since early 2012. It's best to wait for signs of stabilizing credit quality, a lower valuation, or a little of both before hitting the buy button on this stock.
Should you invest $1,000 in Bank of America right now?
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.
Warren Buffett Has $34.8 Billion Invested in This Dividend Stock. Is It a Smart Buy Now? was originally published by The Motley Fool