This too-big-to-fail bank is the second-largest holding in Berkshire Hathaway's portfolio.
It's been 59 years since Warren Buffett bought it. berkshire hathaway $14.86 per share. The holding company's Class A stock has never been split and trades at more than $598,000 per share.
Warren Buffett is widely considered one of the greatest investors of all time, with Berkshire's stock price rising at an annual rate of 19.7% for nearly 60 years. Applying the rule of 72 is fast enough to more than double his initial investment every four years.
Buffett built Berkshire Hathaway into one of America's largest conglomerates by acquiring and investing in profitable businesses that would grow in profitability over time. These days, his second-largest holding in Berkshire's stock portfolio is american bank (BAC 3.35%).
Bank of America was one of just four positions in Berkshire's stock portfolio at the end of 2022 that Buffett added in 2023. This suggests that the legendary investor is quite confident in its long-term success.
Is Bank of America a good buy-and-hold stock for individual investors like Buffett? Here's what you need to know:
Reasons to buy Bank of America stock
Strong brand recognition and customer reluctance to switch financial institutions is a major advantage for Bank of America. Buffett also recognizes that the company is a systemically important financial institution. This means that the U.S. government will step in if banks are hit with an unexpected emergency, as was the case less than 20 years ago.
It's highly unlikely that Bank of America will need a bailout. In the first quarter he finished with a Tier 1 capital ratio of 11.8%. This is a healthy 1.8% above the regulatory minimum.
Bank of America has started offering certificates of deposit (CDs) with interest rates above 4%, but the standard savings account still has an interest rate of 0.01%. It added about 245,000 new consumer accounts in the first quarter, even though savings deposit rates were below average. This was the 21st consecutive quarter of net growth in consumer banking.
In addition to its consumer-favorite brand, Bank of America benefits from an enviable credit rating that lowers its cost of capital compared to smaller banks. With an attractive consumer brand and strong credit rating, Bank of America has increased its dividend by 60% over the past five years. The stock currently offers a 2.8% dividend yield, which isn't all that impressive, but it's rising fast enough to generate significant dividend income over the long term.
Finally, banks are trading at reasonable valuations. At recent prices, you can buy Bank of America stock at about 1.4 times its tangible book value.
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Why you should avoid Bank of America for now
Bank of America relies on its consumer banking division for more than 40% of its total net income. This could be a problem because inflation is putting unbearable pressure on many U.S. consumers.
The company has recorded a lot of net new customer growth, but less cash is being deposited into low-interest savings accounts. Over the past two years, the average balance of savings accounts has decreased by more than 20%, from $72.4 billion in the first quarter of 2022 to $57.4 billion in the first quarter of 2024.
Rising deposit costs caused net investment income to fall 3% in the first quarter from a year earlier, and relief may still be a long way off. Federal Reserve Chairman Jerome Powell recently expressed a lack of confidence that inflation is under control and lowered the likelihood of future rate cuts.
If interest rates persist, it becomes difficult for borrowers to keep up with their delinquent loan payments. Net charge-offs in the first quarter totaled $1.5 billion, an 86% increase over the same period last year.
Is it wise to buy now?
Long-term investors are likely to outperform over the long term, but if you're interested in rapid dividend growth, Bank of America may not be the best dividend stock to buy now. Given recent trends in consumer credit, revenue growth may be even more difficult in the coming years.
Credit card loan charge-off rates for the 100 largest US banks reached 3.96% in the fourth quarter of 2023. This is the highest since early 2012. It is best to wait for signs of credit quality stabilizing, declining valuations, or declining ratings. Try a little bit of both before hitting the buy button on this stock.
Bank of America is an advertising partner of The Motley Fool's Ascent. Cory Renauer has no position in any stocks mentioned. The Motley Fool has a position in and recommends Bank of America. The Motley Fool has a disclosure policy.
