Buffett has sold $7 billion of BofA. Is it a warning sign?
Berkshire Hathaway CEO Warren Buffett has long been a fan of bank stocks. In fact, the banking/insurance sector has likely been the sector he’s invested the most in over his career. In recent years, Bank of America (BAC -1.47%) has been Berkshire’s No. 1 holding among bank stocks, but that seems to be changing.
Buffett’s conglomerate has been steadily selling off Bank of America, and it’s not fully clear why. So what should investors do?
Image source: Bank of America
Buffett and Bank of America
Buffett has long been a fan of Bank of America, singing the praises of CEO Brian Moynihan time and again, and he’s owned the stock since he bought preferred shares of BofA in 2011.
The country’s No. 2 bank by assets has long been Berkshire’s No. 2 holding behind Apple, but Buffett has sold a significant portion of his holdings in recent months. In its most recent filing from Sept. 10, Berkshire Hathaway said it had sold 5.8 million shares of Bank of America in just the three sessions leading up to that day, generating roughly $230 million in proceeds.
Since mid-July, Berkshire has sold roughly $7.2 billion worth of BofA stock. Buffett hasn’t commented on the sale, but there is plenty of speculation about the move. CEO Brian Moynihan has said that he doesn’t know why Buffett is selling the stock, and can’t ask him.
Some have suggested that Berkshire is interested in getting its stake below 10% so it doesn’t have to report its activity in the stock anymore. Buffett also told Berkshire shareholders earlier this year that he was selling Apple stock partly as a hedge against a higher capital gains tax rate, though Washington doesn’t seem to be considering such a move anymore.
The Berkshire chief could also just be interested in raising cash in anticipation of a possible recession. The conglomerate already has a record-high cash balance after dumping so much of its Apple stake. Finally, it’s possible that Buffett and his team at Berkshire no longer think Bank of America is as good of an investment as it once was.
Should you follow Buffett’s move and sell Bank of America? Let’s take a closer look.
Where Bank of America stands today
Bank of America posted mixed results in its most recent earnings report. Revenue was essentially flat in the quarter, up 1% to $25.4 billion, though net interest income was down 3% to $13.7 billion. Earnings per share fell from $0.88 to $0.83.
The company is seeing growth in loans, which were up modestly from the year-ago quarter to $1.05 billion, and average deposits increased 2% to $1.91 billion, showing its balance sheet is growing.
The Federal Reserve cut interest rates by 50 basis points on Wednesday, but the impact on Bank of America is expected to be mixed. Net interest income is likely to fall as credit spreads shrink. However, a stronger economy is good news for Bank of America and should encourage more credit card spending, more consumer and business borrowing, lower provisions for credit losses, and increased demand for refinancing and mortgages.
The company does expect net interest income to improve from $13.9 billion in the second quarter to $14.5 billion, benefiting from fixed-rate asset repricing due to lower interest rates and the end of a bank yield index that it had paid into. The fixed-rate asset pricing shows there are some benefits to lower rates for BofA even though it expects the direct impact of lower rates to be negative.
As a stock, Bank of America looks like a solid value, trading at a price-to-earnings ratio of 14 and offering a dividend yield of 2.6%.
Little has changed with the company since Buffett began selling, though the interest rate environment has evolved. In light of that, Bank of America investors may want to observe the business over the next few quarters to see how it performs in a falling interest rate environment.
In fact, the best reason to hold BofA stock may be Buffett’s own longtime endorsement of the business and CEO Brian Moynihan, who doesn’t do “dumb things,” according to Buffett. Berkshire’s sales don’t seem motivated by any problems with BofA’s business. The bank stock is safe to own and looks like a solid bet for value and dividend investors.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.