Bank of America Corp (NYSE:BAC) stock continues to perform well. BAC stock has been the best performer in large-cap financials since the presidential election, gaining some 46% since November 1st. Even as the bank rally slowed in 2017, BofA has outperformed, rising 9% YTD and trailing only Citigroup Inc (NYSE:C) among major banks and brokerages.
So far this year, I’ve argued repeatedly that BAC stock has more room to run. I see little reason to change that opinion now short of a disaster come Tuesday morning when the bank reports its second-quarter earnings.
If anything, BofA has more good news coming and that, in turn, means the rally in BAC should continue.
A Vote of Confidence in BofA From Warren Buffett
From a fundamental perspective, the news that Warren Buffett and Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) are converting their BofA preferred stock into common stock doesn’t materially change the bull case for BAC stock. Berkshire is, essentially, trading some downside protection — the senior status of the preferred, should BofA run into trouble — for a higher dividend payment, now that the bank has hiked its payout to 48 cents annually.
For shareholders who own the other 93%, the trade simply doesn’t have that much impact. At least not in theory.
But in practice, Buffett’s move is a vote of confidence in Bank of America. The so-called “Oracle of Omaha” very well could have exited his BAC stake. After all, he made his investment in 2011 when BofA was in a far worse position than it is now.
He was, reportedly, up some $12 billion at the trade, at least on paper. Given Berkshire’s large stake in Wells Fargo & Co (NYSE:WFC), Buffett could argue that his company has enough exposure to large-cap banks already.
The fact that Berkshire is instead sticking around doesn’t guarantee upside in BAC stock. But, it does imply that Buffett sees Bank of America as still undervalued. Given his track record, investors should take note.
Regulatory Risk Lessens for BAC Stock
Bank of America’s increased divided was one key reason that Buffett chose to convert his stake. BofA was able to do so because it passed the Federal Reserve’s “stress test.”
That allows Bank of America to increase shareholder returns, including the dividend hike. That raise pushes the yield offered by BAC stock to 1.24%, which is itself good news for the stock.
But, it also implies a return to normalcy for not only BofA, but it’s “too big to fail” peers. After a long, hard slog coming out of the financial crisis, banks can get back to offering solid dividends and providing reasonably safe long-term investments. That’s what Buffett looks for, and why he’s happy to own such a large block of BAC stock.