Banking & Finance

Why Warren Buffett Doubled Down on BofA Even More Over Wells Fargo

Bank of America Corp. (NYSE: BAC) already was one of the top equity holdings of Berkshire Hathaway Inc. (NYSE: BRK-A). The position originally dates back to a preferred share private financing in the post-recession years when Bank of America was lagging, but Warren Buffett has added handily to his shares of one of the top money center banks.

What is also interesting is that the 6% gain to the Berkshire stake in Bank of America to 950 million shares is that Buffett and company are now more than a 10% holder of the shares. The conglomerate and investing giant had once shied away because of regulatory concerns, but some of those restrictions in banking stocks appear to be given some leeway.

Another issue driving the stake into the 10% holder category is that Bank of America has been buying back stock. After the Federal Reserve’s CCAR (stress tests) generated no objection to the bank’s capital return plans for the next 12 months, the bank committed to return a whopping $37 billion to shareholders through dividends and share repurchases. With close to $30 billion targeting net buybacks, Bank of America may retire about 10% of its net outstanding shares, based on current prices.

These will take place from July 1, 2019, through June 30, 2020, and the prior $0.15 per common share dividend is rising by 20% to $0.18 per share. Also worth noting is that this $0.72 per share annualized payout, with its shares recently closing at $30.77, will generate a 2.34% yield for new investors. For Buffett and his average cost basis, that dividend yield will be drastically higher.

The bank’s common shares were trading at $28.21 ahead of the CCAR results and traded up to $29.00 the day immediately after the stress test results were released.

Berkshire Hathaway previously owned more than 896 million shares of Bank of America, for a 9.43% total stake in the banking giant. That was valued at $24.7 billion at the end of March, but the new 950 million share stake and a recent $30.77 price per share will come to a value of roughly $29.2 billion.

Vanguard was the next closest stakeholder with a 6.94% stake worth $18.2 billion at the end of the first quarter, followed by BlackRock with a 5.94% stake (worth $15.5 billion) and State Street with a 4.12% stake (worth $10.8 billion). Fidelity entities and funds owned a 3.41% stake at the end of the first quarter.

Buffett has not abandoned Wells Fargo & Co. (NYSE: WFC) by any serious amount, but the conglomerate had trimmed its stake over recent quarters to avoid that 10% ownership threshold. At the end of the first quarter of 2019, the Berkshire Hathaway stake of more than 409.8 million shares was a 9.12% overall stake worth $19.8 billion. Based on the most recent close of $49.30, that stake would have a value of approximately $20.1 billion, if the stake has not changed.

Check out a snapshot of all of Warren Buffett’s key changes made for 2019.

Wells Fargo remains a key long-term hold for Berkshire Hathaway, but Bank of America is not under the same amount of public scrutiny, and Bank of America doesn’t have any big gaps in its management ranks like Wells Fargo.

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