Is Bank of America the Long Term For You?


The past five years have been difficult for dividend investors. In an era of widespread technological disruption, the market favored growth stocks that typically don’t pay dividends. At the same time, many mature companies that pay high dividends are generally threatened by this disruption. And dividend payers who have strong companies tend to trade at very high valuations.

But banking is one area where investors can find reliable and growing dividends at reasonable valuations today. Growth tech stocks, last year’s winners, sold on fears of rising interest rates, but most major banks should benefit from the rate hike, which may increase their interest margins sharp. As such, banks can be great havens for older investors and today’s retirees. Perhaps none of the banks are better suited to this risky cohort than Bank of America (NYSE: BAC).

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Warren Buffett’s favorite

Warren Buffett sold numerous bank stocks last year, but he added to his stake in Bank of America. Buffett’s conglomerate, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), owns just over 1 billion shares, or 11.4% of Berkshire’s stock portfolio, and its second-largest public stake in total.

Why does Buffett love Bank of America so much? Likely for its conservative underwriting philosophy under the leadership of CEO Brian Moynihan, passionately named “Responsible Growth”.

Responsible growth

Since Moynihan took over in 2010, Bank of America has remained largely true to its knitting with simple loans, while avoiding risks and exotic products like those that recently put several banks in trouble with hedge fund Archegos Capital. Management. In the wake of the global financial crisis, the reorganized “Responsible Growth” strategy is based on four pillars:

  • We must grow in the market, no excuses.
  • We have to grow by focusing on the customer.
  • We have to grow within our risk framework.
  • We need to grow sustainably.

This risk framework is intended to be conservative, long-term focused and focused on the big picture. As the strategy was implemented, Bank of America’s bottom line became more stable and consistent.

Even in the pandemic year, in which some banks saw their profits turn negative, some even needing to temporarily cut dividends, Bank of America generated $ 17.9 billion in net income and maintained its payment, now earning 1.82%. Thanks to cautious underwriting, net write-offs increased only slightly, from $ 3.6 billion in 2019 to $ 4.1 billion in 2020. Being extremely well capitalized, Bank of America has been given the green light to resume share buybacks by the Federal Reserve.

And invest in the future

While some believe traditional banks are threatened by digital fintech startups, the bigger, better-managed banks still have competitive advantages. These include large nationwide branch networks, which allow for low-cost deposits, as well as the financial means to invest heavily in technology.

BofA has invested $ 18 billion in technology over the past six years, while opening 300 new branches and renovating another 2,000. These technological investments have enabled even greater cost reductions; operating expenses have decreases from $ 57 billion in 2015 to $ 55 billion last year, despite $ 1.5 billion in additional costs related to COVID-19. And this despite the company’s decision to increase its minimum hourly wage to $ 20 an hour during this period.

Another game of value

Bank of America is trading around 15.8 times this year’s earnings estimates, in line with other major banks but still well below the overall market. Banks have generally had lower price-to-earnings ratios since the financial crisis amid weak economic growth, low interest rates and post-financial crisis regulations.

Still, Bank of America and other large-cap banks generated stable earnings and high returns on equity during this time, returning money back to shareholders in the form of dividends and share buybacks. Essentially, the big banks have become more like reliable, low-growth utilities.

Yet those same capital regulations have enabled the banking industry to weather the COVID-19 crisis relatively unscathed. At the same time, given the unprecedented amount of fiscal and monetary stimulus now arriving in the economy, and perhaps more with a new infrastructure bill, the two headwinds of weak growth economy and low long-term interest rates could be reversed. If interest rates increased, Bank of America would likely experience an increase in its net interest income, given its loan-intensive business model.

Security, dividends and inflation hedging

Big banks have generally proven to be safe in the midst of this COVID crisis and are expected to benefit from higher economic growth after the pandemic. If you want to invest in financial reflation trading, Bank of America may be the best choice for low risk dividend investors, such as retirees.

Yet while young investors tend to invest in more showy, growth-oriented companies, they could also benefit from Bank of America’s resilience, growing dividends, and ability to thrive in a market environment. higher rates.

In short, BofA is a solid choice for all types of long-term dividend investors … you know, like Warren Buffett.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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