It’s recently come to light that Bank of America Corp (BAC) is warning its UK managers to refrain from using the word “Brexit” in conversations with clients. BAC doesn’t want to appear to be backing one side or the other in the all-important June 23 vote deciding whether the UK should exit the European Union.
It’s possible a UK exit from the EU could hurt U.S. banks like BAC looking to expand their presence in other parts of Europe. Originally, BAC supported staying in the EU but has backed off that position to respect the free will of UK citizens.
Investors interested in buying stock in Bank of America should ignore the media noise on this issue and focus on the pros of owning BAC shares.
For me, there are three reasons — none of which having anything to do with the outcome of the Brexit vote.
Warren Buffett Loves BAC Stock
By now it’s no secret that Berkshire Hathaway Inc. (BRK.A, BRK.B) has made an absolute fortune on its 2011 purchase of $5 billion in preferred shares paying a 6% annual dividend.
Those preferred shares can’t be redeemed by Bank of America until May 7, 2019. Assuming they ante up the required $5.25 billion at that time, BRK.B will have received approximately $2.3 billion in dividends over 92 months. That’s a pretty good T-bill rate.
But, of course, there’s also the warrants to buy 700 million shares of BAC stock anytime before September 1, 2021, at $7.14 per share. BAC closed trading April 4 at $13.51 per share. As of now, Buffet’s sitting on a $4.5 billion profit on the warrants.
Why not exercise those warrants today?
Because he believes the bank’s shares will be worth a lot more in 10-year’s time. In his 2015 letter to shareholders, he said about BAC, “Bank of America is, in effect, our fourth largest equity investment – and one we value highly.”
More importantly, if you don’t intend to sell, foregoing $300 million in annual dividends makes almost no sense given the amount of cash on Berkshire’s balance sheet. It’s a rounding error and won’t move the needle on the acquisition front.
This is easily the biggest reason to own BAC.
Bank of America Is Ridiculously Cheap
Simply said, equity in Bank of America is dirt cheap. With the exception of its two-week swoon in early February, BAC shares haven’t traded this low since July 2013.
This makes little sense given the difference in earnings between 2013, when BAC generated $11.4 billion in net income, and this past year’s $15.9 billion haul. Sure, it’s got some loans in the oil patch looking a little shaky right about now, but so does every other big bank.
BAC’s fourth-quarter announcement in January was its fourth consecutive quarter delivering a higher profit year-over-year.
Like every bank, it’s got areas where it needs improvement (such as getting more business from each client), but at the end of the day, CEO Brian Moynihan’s comment accompanying its announcement that its 2015 results were its highest earnings in almost a decade speaks volumes.
BAC Stock Repurchases
In March, BofA’s board increased its share repurchase plan by $800 million to augment the existing $4 billion program established a year earlier. Although it’s intended to offset equity-based compensation for retirement-eligible employees, the move continues to send a signal that its stock is worth owning.
In 2015, it repurchased 140.3 million shares at an average price of $17.10 per share. Over the past three years, it has paid $15.43 per share to buy back 473.1 million BAC shares. The average stock price (high of $18.48, low of $10.98) over the past three years was $14.73, suggesting BAC paid about 5% more than the average.
It can do better.
With approximately $3.8 billion in share repurchases available to it, less what it might have done in the first three months of the year, BAC has an opportunity to double down. Warren Buffett would certainly approve.
Come April 14, investors will know how BAC feels about its future.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
