There are many different types of investors on Wall Street, but the CEO of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) is in a class of its own. Since taking over the helm of the holding company, he has achieved a return of 4,615,876%. That’s about twice as much as investors would have earned by investing in the benchmark S&P500 index.
You don’t have to be a Wall Street insider to know which stocks Buffett and Berkshire Hathaway are investing in. Every three months, the Securities and Exchange Commission forces anyone managing assets totaling more than $100 million to disclose trading activity.
Berkshire Hathaway ended September with 40 different positions and a large cash position. The Oracle of Omaha isn’t afraid to focus on a handful of his favorite things. The third largest holding company, Bank of America(NYSE: BAC)is worth about $31.7 billion, or 12% of Berkshire’s stock portfolio.
Before you rush to buy Bank of America stock, know that Buffett cut his position by more than 235 million shares in the third quarter. Let’s weigh some reasons to buy the stock against the challenges the bank faces to see if it’s a smart buy now.
Bank of America has benefited greatly from a higher interest rate environment and a respected brand. Federal funds rates have risen sharply in 2022, and numerous smaller competitors have increased the rates they offer their customers accordingly. Bank of America still offers its huge customer base an interest rate of 0.04% or less on savings deposits.
Much of Bank of America’s savings deposits flowed into higher-yielding CDs and retirement accounts, but very little flowed to competitors. It reported total deposits of $1.9 trillion at the end of September.
Effective Federal Funds Rate data according to YCharts.
Thanks to higher interest rates and strong deposit retention, profits have soared. Net interest income, or the difference between interest paid and interest received, has risen about 30% over the past three years to $55.7 billion over the past 12 months.
Bank of America shares are up about 36% through 2024, but still look cheap. It traded for 14.1 times forward earnings estimates, while the average stock in the Dow Jones Industrial Average trades at 22.6 times forward earnings estimates.
In 2022, when interest rates started to rise, Bank of America held many long-term government bonds and other investments that pay very low fixed interest rates. The price of any fixed income security falls as interest rates rise. As a result, the company faces $89 billion in unrealized safety losses.
Investors don’t have to worry about Bank of America reporting a big loss as it plans to hold these securities until maturity. With $1.9 trillion in deposits, it is extremely unlikely that the bank will have to sell these securities at a loss.
Bank of America’s net interest income in recent years is nothing to complain about, but it could have been much better. Anticipating higher rates, JPMorgan Chase(NYSE:JPM) miss opportunities to invest by hoarding cash in early 2022.
BAC Net Interest Income (TTM) data according to YCharts.
JPMorgan’s somewhat risky decision to eschew long-term government bonds in favor of cash has paid off. Net interest income rose by a whopping 78% to $93.3 billion over the past three years.
Before you decide whether to buy Bank of America stock, it’s important to understand what’s important to you. If you’re interested in steady, reliable profits like Buffett enjoys, this could be a smart buy right now.
Bank of America shares offer a paltry 2.3% dividend yield at recent prices, but could provide a ton of passive income by the time you retire. The company has increased its payout by 44% over the past five years. It may not be a top performer, but the chances of losing money in the long run seem slim.
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*Stock Advisor returns December 16, 2024
Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.
Warren Buffett has invested $31.7 billion in this reliable dividend stock. Is it buy now? was originally published by The Motley Fool
