Warren Buffett’s Equity Investment Portfolio Part 1: Bank Stocks
Learn from the best
Whether you’re a seasoned investor or just starting out, there’s a good chance you can learn something from “Oracle of Omaha” Warren Buffett. From 1964 to 2018, the Buffett company Berkshire Hathaway Inc. (NYSE: BRK.B) generated a total return of 2,472,627%. It is not a typo. (Source: “Berkshire’s performance against the S&P 500, Berkshire Hathaway Inc., last accessed September 6, 2019.)
While everyone wants to earn capital gains like this, it’s worth noting that Buffett is also a huge fan of dividends. In fact, one of the reasons Berkshire was able to achieve such astronomical returns was its substantial holdings of dividend-paying companies.
This concentration has continued to this day. According to Berkshire’s latest 13-F file with the United States Securities and Exchange Commission (SEC), Buffett’s top 10 positions in terms of market value were dividend-paying stocks as of June 30. (Source: “Information table for form 13F, United States Securities and Exchange Commission, last accessed September 9, 2019.)
Needless to say, Buffett’s portfolio deserves serious consideration 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 its billions of dollars.
In a series of articles entitled To graft on the portfolio of Warren Buffett, I’ll discuss some of the themes of the legendary investor’s portfolio, as well as his recent moves, with a focus on income generation. The first part of this series deals with American banks.
Warren Buffett and banking stocks
Income investors are no strangers to bank stocks. In essence, banks lend money at higher interest rates than they borrow, pocketing the difference. This simple and profitable business model has worked well for centuries. And that is why today, many banks are still making money hand in hand.
Additionally, because these companies are well established (America’s oldest bank has a history dating back to 1784), they have the ability to return part of their profits to shareholders in the form of dividends. Looking around, most of the well-known banks in the United States have a regular dividend policy.
Does Warren Buffett like bank stocks? Well, if you look at the holdings of Berkshire Hathaway Inc, the answer is a resounding “yes”.
As of June 30, six of the top 10 holdings in Warren Buffett’s portfolio by market value were from the financial services industry: Bank of America Corp (NYSE: BAC), Wells Fargo & Co (NYSE: WFC), American Express Company (NYSE: AXP), US Bancorp (NYSE: USB), JPMorgan Chase & Co. (NYSE: JPM), and Moody’s Corporation (NYSE: MCO).
Of course, these include more than banks, but if you look further down Buffett’s list of holdings, you’ll see that Berkshire also had significant 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 banking company (NYSE: MTB), and Synchrony Financial (NYSE: SYF).
And guess what all of 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 about $ 90.0 billion in financial services stocks, with much of that $ 90.0 billion invested in bank stocks. This makes the billionaire investor one of the largest funders in the US banking industry.
Note that while Warren Buffett is known to have long holding periods for his investments, his positions do not always stay the same size, even in secular banking. For example, the Oracle of Omaha recently increased its stake in two US bank stocks in particular: US Bancorp and Bank of America Corp.
US Bancorp is the parent company of American Bank, America’s fifth largest commercial bank. Based in Minneapolis, US Bancorp has $ 476.0 billion in assets, 2,973 branches and more than 4,600 ATMs across the country. (Source: “About US Bancorp”, US Bancorp, last accessed September 9, 2019.)
With 74,000 employees and an extensive network, the company provides a broad range of services to millions of retail, business, wealth management, payments, commercial and corporate clients.
In the second quarter of 2019, Buffett’s company purchased nearly 3.2 million US Bancorp shares, bringing its total position in the bank to 132.5 million shares. At current market prices, Berkshire’s stake in USB shares is worth over $ 7.0 billion.
The good thing is that US Bancorp is very favorable to income investors. The company follows a dividend policy that grants shareholders a cash payment of $ 0.37 per share on a quarterly basis. With USB shares trading at $ 534.72 apiece, that quarterly rate works out to an annual return of 2.8%.
Sure, there are stocks with higher payouts, but, at the time of this writing, the average dividend yield for all companies in the S&P 500 is only 1.9%. (Source: “S&P 500 dividend yield, Multpl.com, last accessed September 9, 2019.)
In addition, in addition to paying a stable dividend, which many banks have been doing since the last financial crisis, US Bancorp has increased its payouts. Over the past five years, the quarterly dividend rate for USB stock has risen from $ 0.245 per share to $ 0.37 per share, marking a total increase of 51%. (Source: “Information on dividends and stock splits”, US Bancorp, last accessed September 9, 2019.)
And if you’re wondering if the bank can afford such a massive increase in its dividend obligation, don’t worry. According to its latest earnings report, US Bancorp achieved net income of $ 1.09 per share in the second quarter of 2019. To put that into perspective, the amount covered nearly three times the quarterly cash dividend of $ 0.37. per share of the company. (Source: “US Bancorp Reports Second Quarter 2019 Results”, US Bancorp, last accessed September 9, 2019.)
In the first six months of 2019, US Bancorp’s net income was $ 2.09 per share. Its declared dividends, by contrast, were $ 0.74 per share. Again, the company’s profits easily covered its payout during this time.
The best part is, while the banking industry is centuries old, US Bancorp’s business is booming. In the second quarter of this year, the company’s net sales increased 3.2% year-on-year. Meanwhile, US Bancorp’s net interest income, a critical measure of a bank’s performance, grew 3.4% year-on-year.
With a decent current yield, growing business and a low payout ratio, US Bancorp is well positioned to deliver more dividend hikes. Therefore, it is 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 US financial sector and another banking stock of Warren Buffett. Through its 4,300 retail financial centers and 16,600 ATMs, the company serves approximately 66 million personal and small business customers. Concurrently, Bank of America Corp provides wealth management, merchant and investment banking and trading services to institutional clients. (Source: “Company ProfileBank of America Corp., last accessed September 9, 2019.)
If you take a look at Berkshire’s latest 13-F file, you’ll see that as of June 30, the company held 927.2 million shares of Bank of America Corp, which has a current market value of $ 25.6 billion. dollars.
But that’s not all. Berkshire has also filed a Form 3 with the SEC. The record showed that in July 2019, Buffett’s company increased its stake in Bank of America Corp to 950.0 million shares. (Source: “Form 3”, US Securities and Exchange Commission, last accessed September 6, 2019.)
With BAC shares trading at $ 28.72 per share, Buffett’s position in the company is worth around $ 27.3 billion. This makes Bank of America Corp the second largest holding among all stocks in Berkshire Hathaway Inc.’s portfolio.
Again, this is an investor friendly company when it comes to dividends. And just like US Bancorp, Bank of America Corp has increased its payments.
The last dividend increase was in July, when Bank of America’s board of directors declared a regular quarterly cash dividend of $ 0.18 per share, which is a 20% increase from the previous payment. of the society. Looking back, we see that the quarterly dividend rate for BAC stock has increased 260% over the past five years. (Source: “History of dividends / splitsBank of America Corp., last accessed September 9, 2019.)
The company has a growing business to support its growing payout to shareholders. In the second quarter of 2019, Bank of America’s net interest income increased 3% year-on-year. Notably, the bank’s average loan and lease balances across lines of business increased by four percent, while its average deposit balances increased by six percent. (Source: “Bank of America Reports Record Quarterly Profit of $ 7.3 Billion, EPS of $ 0.74Bank of America Corp., last accessed September 9, 2019.)
Ultimately, the bank’s diluted earnings stood at $ 0.74 per share, marking a 17% improvement from a year ago. Notably, the amount easily covered the cash dividend of $ 0.15 per share declared and paid by the company in the second quarter.
Bank of America Corp offers an annual return of 2.5% on its current share price.
Final thoughts on Warren Buffett Bank stocks
Ultimately, to build on Warren Buffett’s success, investors could directly buy shares in Buffett’s company, Berkshire Hathaway Inc. But if they are considering going this route, they must also keep in mind. mind that Berkshire does not pay a dividend.
Therefore, for income investors who wish to borrow some wisdom from the Oracle of Omaha, it is important to study the dividend paying stocks within the Berkshire portfolio.
We just looked at two bank stocks owned by Buffett that are also increasing income. In the remainder of this series, I will be talking about more dividend paying companies in the portfolio of legendary investors.