Piggyback on Warren Buffett’s Portfolio Part 1: Bank Stocks
Learning From the Best
Whether you are a seasoned investor or just getting started, chances are there’s something you can learn from the “Oracle of Omaha” Warren Buffett. From 1964 to 2018, Buffett’s company Berkshire Hathaway Inc. (NYSE:BRK.B) delivered a total return of 2,472,627%. That’s no misprint. (Source: “Berkshire’s Performance vs. the S&P 500,” Berkshire Hathaway Inc., last accessed September 6, 2019.)
While everyone wants to earn capital gains like that, it’s worth noting that Buffett is also a big fan of dividends. As a matter of fact, one of the reasons Berkshire was able to achieve such astronomical returns was its substantial holdings of dividend-paying companies.
That focus has continued to this day. According to Berkshire’s latest 13-F filing to the U.S. Securities and Exchange Commission (SEC), all 10 of Buffett’s top 10 positions by market value were dividend-paying stocks as of June 30. (Source: “Form 13F Information Table,” United States Securities and Exchange Commission, last accessed September 9, 2019.)
Needless to say, Buffett’s portfolio is worth a serious look for income investors. And because Berkshire is required by the SEC to disclose its holdings on a quarterly basis, it’s very easy for us to see what the Oracle of Omaha is doing with his billions of dollars.
In a series of articles titled Piggyback on Warren Buffett’s Portfolio, I will discuss some of the themes in the legendary investor’s portfolio, along with his recent moves, with an emphasis on income generation. The first part of this series is on U.S. banks.
Warren Buffett and Bank Stocks
Income investors are no stranger to bank stocks. At their very essence, banks lend money out at higher interest rates than they borrow at, pocketing the difference. This simple and profitable business model has been working well for centuries. And that’s why today, a lot of banks are still making money hand over fist.
Furthermore, because these companies are well established (the oldest U.S. bank has a history that can be traced all the way back to 1784), they have the ability to return some of their profits to shareholders through dividends. Looking around, most of the well-known banks in the U.S. have a regular dividend policy.
Does Warren Buffett like bank stocks? Well, if you look at Berkshire Hathaway Inc’s holdings, the answer is a resounding “yes.”
As of June 30, six of the top 10 holdings in Warren Buffett’s portfolio by market value came from the financial services industry: Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), American Express Company (NYSE:AXP), U.S. Bancorp (NYSE:USB), JPMorgan Chase & Co. (NYSE:JPM), and Moody’s Corporation (NYSE:MCO).
Sure, these include more than just banks, but if you look further down the list of Buffett’s holdings, you’ll see that Berkshire also had sizable positions in Goldman Sachs Group Inc (NYSE:GS), Bank of New York Mellon Corp (NYSE:BK), Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA), PNC Financial Services Group Inc (NYSE:PNC), M&T Bank Corporation (NYSE:MTB), and Synchrony Financial (NYSE:SYF).
And take a guess what all these financial companies have in common?
They all pay regular dividends.
Again, the names I just mentioned include more than just bank stocks. But if you add them up, you’ll see that Buffett’s company owns around $90.0 billion worth of financial services stocks, with a large portion of that $90.0 billion being invested in bank stocks. That makes the billionaire investor one of the biggest backers of the U.S. banking industry.
Note that, while Warren Buffett is known for having long holding periods for his investments, his positions don’t always stay the same size, even in the centuries-old banking sector. For instance, the Oracle of Omaha recently increased his stake in two particular U.S. bank stocks: U.S. Bancorp and Bank of America Corp.
U.S. Bancorp is the parent company of U.S. Bank, the fifth-largest commercial bank in America. Headquartered in Minneapolis, U.S. Bancorp has $476.0 billion in assets, 2,973 branches, and more than 4,600 ATMs across the country. (Source: “About U.S. Bancorp,” U.S. Bancorp, last accessed September 9, 2019.)
With 74,000 employees and a massive network, the company provides a wide range of services to millions of retail, business, wealth management, payment, commercial, and corporate customers.
In the second quarter of 2019, Buffett’s company bought almost 3.2 million shares of U.S Bancorp stock, bringing its total position in the bank to 132.5 million shares. At the current market price, Berkshire’s stake in USB stock is worth over $7.0 billion.
The neat thing is, U.S. Bancorp is very income investor-friendly. The company follows a dividend policy that gives shareholders a cash payment of $0.37 per share on a quarterly basis. With USB stock trading at $534.72 apiece, that quarterly rate comes out to an annual yield of 2.8%.
Sure, there are stocks with higher payouts, but, at the time of this writing, the average dividend yield of all S&P 500 companies is just 1.9%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed September 9, 2019.)
What’s more is that, other than paying a stable dividend, something many banks have been doing since the last financial crisis, U.S. Bancorp has been growing its payout. Over the past five years, USB stock’s quarterly dividend rate went from $0.245 per share to $0.37 per share, marking a total increase of 51%. (Source: “Dividend and stock split information,” U.S. Bancorp, last accessed September 9, 2019.)
And if you’re concerned about whether the bank can afford such a massive increase in its dividend obligation, don’t worry. According to its latest earnings report, U.S. Bancorp earned a net income of $1.09 per share in the second quarter of 2019. To put that in perspective, the amount covered the company’s $0.37 per share quarterly cash dividend nearly three times over. (Source: “U.S. Bancorp Reports Second Quarter 2019 Results,” U.S. Bancorp, last accessed September 9, 2019.)
In the first six months of 2019, U.S. Bancorp’s net income came in at $2.09 per share. Its declared dividends, on the other hand, totaled $0.74 per share. So again, the company’s profits easily covered its payout during this period.
The best part is, while the banking industry is centuries old, U.S. Bancorp’s business has been booming. In the second quarter of this year, the company’s net revenue increased 3.2% year-over-year. Meanwhile, U.S. Bancorp’s net interest income—a critical measure of a bank’s performance—grew 3.4% year-over-year.
With a decent current yield, a growing business, and a low payout ratio, U.S. Bancorp is well positioned to deliver more dividend hikes. Therefore, it’s a Warren Buffett bank stock that deserves the attention of income investors.
Bank of America Corp
Bank of America Corp is another major player in the U.S. financial industry—and another Warren Buffett bank stock. Through its 4,300 retail financial centers and 16,600 ATMs, the company serves approximately 66 million consumer and small business clients. At the same time, Bank of America Corp provides wealth management, corporate and investment banking, and trading services for institutional clients. (Source: “Corporate Profile,” Bank of America Corp, last accessed September 9, 2019.)
If you take a look at Berkshire’s latest 13-F filing, you’ll see that, as of June 30, the company owned 927.2 million shares of Bank of America Corp, which has a current market value of $25.6 billion.
But that’s not all. Berkshire also filed a Form 3 to the SEC. The filing showed that, in July 2019, Buffett’s company increased its stake in Bank of America Corp to 950.0 million shares. (Source: “Form 3,” U.S. Securities and Exchange Commission, last accessed September 6, 2019.)
With BAC stock trading at $28.72 per share, Buffett’s position in the company is worth approximately $27.3 billion. That makes Bank of America Corp the second-largest holding among all the stocks in Berkshire Hathaway Inc’s portfolio.
Again, this happens to be a dividend investor-friendly company. And just like U.S. Bancorp, Bank of America Corp has been raising its payout.
The latest dividend hike came in July, when Bank of America’s board of directors declared a regular quarterly cash dividend of $0.18 per share, representing a 20% increase from the company’s prior payout. Looking back, we see that BAC stock’s quarterly dividend rate has gone up a staggering 260% over the last five years. (Source: “Dividend/Split History,” Bank of America Corp, last accessed September 9, 2019.)
The company has a growing business to support its rising payout to shareholders. In the second quarter of 2019, Bank of America’s net interest income increased three percent year-over-year. Notably, the bank’s average loan and lease balances in business segments rose four percent, while its average deposit balances increased six percent. (Source: “Bank of America Reports Record Quarterly Earnings of $7.3 Billion, EPS $0.74,” Bank of America Corp, last accessed September 9, 2019.)
At the bottom line, the bank’s diluted earnings came in at $0.74 per share, marking a 17% improvement from a year ago. Notably, the amount easily covered the company’s cash dividend of $0.15 per share declared and paid during the second quarter.
Bank of America Corp offers an annual yield of 2.5% at its current stock price.
Final Thoughts on Warren Buffett Bank Stocks
At the end of the day, to piggyback on Warren Buffett’s success, investors could buy shares of Buffett’s company Berkshire Hathaway Inc directly. But if they plan to go that route, they should also keep in mind that Berkshire does not pay a dividend.
Therefore, for income investors who want to borrow some wisdom from the Oracle of Omaha, it’s important to study the dividend stocks within Berkshire’s portfolio.
We have just looked at two bank stocks owned by Buffett that are also rising income plays. In the rest of this series, I’ll be discussing more dividend-paying companies in the legendary investors’ portfolio.