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Warren Buffett is considered one of the greatest investors for a reason. He knows how to invest at the most opportune times.
Warren Buffett bought into American Express (NYSE: AXP) after the “Great Salad Oil Scandal” in the 1960s and interpreted the changing business focus of Coca-Cola (NYSE: KO) – and the “New Coke” blunder – in the late 80s as an investing opportunity.
He even took advantage of the financial crisis, investing $5 billion into the preferred stock of Goldman Sachs (NYSE: GS) after the collapse of Lehman Brothers. Buffett later sold his position in Goldman, but there’s still one major bank that doesn’t show up in Buffett’s Berkshire Hathaway (NYSE: BRK-B) portfolio.
Over 35% of Buffett’s Berkshire Hathaway public equity portfolio was invested in financials heading into 2016. He loves banking so much that he has one bank as his top stock holding: Wells Fargo (NYSE: WFC).
Tucked Away: Another Warren Buffett Bank
Bank of America (NYSE: BAC), as Buffett noted in Berkshire’s recent shareholder letter, is in effect its fourth-largest equity investment. Buffett invested in Bank of America back in 2011, getting $5 billion in preferred stock yielding 6% a year, plus warrants to purchase 700 million shares at an exercise price of $7.14 a share.
At today’s prices, Buffett’s Bank of America stake is worth around $15 billion. For context, his Wells Fargo position is valued at just over $25 billion. The Bank of America stake would rank as Buffett’s fourth largest holding, coming in just behind his $17 billion stake in Coca-Cola.
Now Bank of America shares are already down 20% year-to-date, but it’s still the cheapest of the big banks, trading at 60% of book value. Compare that to JPMorgan Chase (NYSE: JPM) at 1 times book value and Wells Fargo at 1.5 times. Bank of America also offers a 1.5% dividend yield. It looks to be another Buffett stock on sale.
Breakup Potential?
Bank of America has managed to shake off its mortgage troubles from the mid-2000s and now has a massive deposit and lending base that it can cross-sell with its Merrill Lynch broker and wealth management business.
The bank also has impressive exposure to the U.S. consumer, given its deposit and lending base, which should benefit from a strengthening U.S. economy.
Buffett has until September 2021 to convert his warrants into shares. In all likelihood he will, as Bank of America shares are trading well above the $7.14 exercise price, at $13. Buffett also noted in his Berkshire 2015 letter that, “We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase.”
Bank of America, which is the second-largest U.S. bank by assets, has also been floated as a breakup target. It has three large businesses that many feel would be perform best as individual companies – including its consumer and investment banking businesses. But with Buffett as a major shareholder, there would be little risk of a breakup. Meanwhile, Citigroup (NYSE: C) and JPMorgan could become top breakup targets.
Now, Bank of America’s dividend is on the low-end compared to the other big banks, but there will likely be pressure to boost that dividend once Buffett becomes a formal shareholder.
Buffett got a very good deal on Bank of America shares, but shares might still be worth considering at $13 a share. A lot of the “risk” has since been removed from the balance sheet and the worst looks to be behind the big bank, including the mortgage problems that helped give Buffett his sweetheart deal.
Warren Buffett’s Big Secret
Warren Buffett didn’t become the world’s richest investor by accident. He did it by investing in a certain kind of stock. Few realize what separates this kind of stock from 99% of equities. But once you do, you’ll never invest the same way again. Discover Buffett’s big secret right here.