Bank of America Stock: Is It a Good Buy?
Written by
John Csiszar
Edited by
Susan Kim
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Bank of America might not be the most exciting stock on Wall Street, but if you want to make money over the long run — and believe in the bets made by the Oracle of Omaha himself, famed billionaire Warren Buffett — then it might be just what you’re looking for. Here’s a quick rundown on why many analysts and investors alike are backing the second-largest bank in the United States.
Valuation
Bank of America’s current price-earnings ratio is 12.58x, which is in line with its estimated forward P/E ratio of 14.59. The P/E for the S&P 500 index as a whole is 27.24, according to The Wall Street Journal. While bank stocks are not high-flyers that command excessive P/E ratios, this puts Bank of America stock at a significant discount compared to the forward S&P 500 P/E ratio. With fortunes seemingly changing in favor of the bank, this could be an attractive level for purchase for long-term value investors.
Dividend Yield
If you’re looking for a stock that pays a solid dividend, Bank of America should catch your attention. As of Dec. 31, 2021, the S&P 500 index was yielding 1.29%, but Bank of America currently pays a 1.87% yield. That may not seem like much, but in today’s low-dividend world, it equates to about a 47% increase over the S&P 500’s yield.
The company struggled during the financial crisis of 2007-08, and it ultimately had to cut its quarterly dividend to just $0.01 per share for its March 27, 2009, payout. However, since then the dividend has grown by a factor of 21, to $0.21 per share every quarter. Investors received their most recent dividend payment on Dec. 2, 2021.
Catalysts for Growth
After years of enduring a low-interest rate environment, the coronavirus pandemic hit the economy in 2020. This one-two punch decimated Bank of America’s loan business, which is the primary way banks make money.
Traditionally, the function of a bank is to take the money deposited by customers and lend it out to borrowers. Banks earn money on the spread between the low interest rates they pay depositors and the higher rates they collect from borrowers. But in a low-interest-rate environment, there’s not much of a spread between short- and long-term interest rates. Coupled with the pandemic shutting down most businesses, loan activity simultaneously dried up, making for a disastrous scenario for banks.
The good news for Bank of America is that things are slowly returning to normal. In the fourth quarter of 2021, loans grew by $51 billion. That growth, coupled with increases in Consumer Banking (16%) and Global Wealth and Investment Management (20%) deposits, resulted in a $1.2 billion increase in net interest income compared to the fourth quarter of 2020. This improvement and improvement in the economy allowed Bank of America to release $851 million in loan reserves it had set aside to offset credit losses, resulting in a 6% increase in book value per share of stock — good news for stockholders.
Consumers and businesses alike have been flooded with government stimulus money, and this has already been driving longer-term interest rates higher. Meanwhile, the Federal Reserve, which had committed to keeping short-term interest rates low while the economy got its bearings following pandemic reopenings, will look to interest-rate hikes to control inflation. Markets anticipate four 0.25% hikes this year, CNBC reported, but some analysts think the Fed could be even more aggressive than that. Either way, Bank of America now has some major catalysts behind it.
What’s Warren Buffett’s Take?
Warren Buffett is one of the most successful investors of all time. The CEO of Berkshire Hathaway, Buffett’s investment vehicle, has a net worth of $110.5 billion, which makes him the seventh-wealthiest person in the world, according to Forbes’ Real-Time Billionaires list. Buffett’s annual letter to the shareholders of his company is an almost religious experience, popular among professionals and amateurs alike due to his history of investment success and his ability to explain complicated financial matters in simple, folksy terms. The bottom line is this — when Buffett talks, people listen.
Of course, sometimes the best endorsement Buffett can give a stock is in his trading activity. Bank of America certainly seems to have the green light from Buffett, as it’s Berkshire Hathaway’s largest bank investment by far. In fact, it’s currently Buffett’s largest holding overall, with over a billion shares owned at a current value of nearly $46.4 billion, according to the company’s September 2021 and November 2021 13F filings, as analyzed by CNBC.
Good To Know
Perhaps the greatest evidence of Buffett’s fondness for Bank of America was demonstrated in 2020 and 2021, when Buffett sold shares in numerous other financial holdings while bolstering his Bank of America investment. His purchases of Bank of America stock have increased his stake to 12.6% of the company. And, in true Buffett fashion, those purchases have already proven to be big winners, as Bank of America traded at about $25 per share at the time of his 2020 purchases, marking a nearly 80% gain as of Jan. 21.
So, Is Bank of America Stock a Good Buy?
While investors would no doubt like to have bought Bank of America stock back when Buffett was loading up in midsummer 2020, the stock still appears to have some room left to run. Bank of America’s above-average dividend yield and good valuation already make it worth taking a look at, but additional factors seem to be supporting the long-term growth of the company’s share price. America’s slow recovery from the coronavirus pandemic should continue to unleash both consumer and business spending and loan activity. Additionally, interest rate spreads are likely to increase, which is another catalyst for banks as a whole.
To top it all off, one of the most successful investors in the world owns 12.6% of the outstanding shares of Bank of America, meaning those who buy the stock now are in good company. Just be sure to talk with your investment advisor to ensure that a purchase of Bank of America shares matches your own personal investment objectives and risk tolerance.
Daria Uhlig contributed to the reporting for this article.
Data is accurate as of Jan. 21, 2022, unless otherwise noted, and subject to change.
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- Bank of America. 2022. "4Q21 Earnings Press Release."
- Reuters. 2022. "Fed to raise rates three times this year to tame unruly inflation: Reuters poll."
- CNBC. 2022. "Inflation surge could push the Fed into more than four rate hikes this year, Goldman Sachs says."
- CNBC. "Berkshire Hathaway Portfolio Tracker."
