Shares of Bank of America Corp (NYSE:BAC) have risen as much as 10% since I last issued my buy recommendation on Jan. 24, during which I predicted BAC stock will reach $28 in the next 12 to 18 months, delivering 25% returns.
Now, though, it’s possible that target might be underestimating Bank of America’s real potential.
As of Friday’s close, BAC stock has improved by about 10% year-to-date, fueling most of a 16% run over the past three months. On Saturday, billionaire investor Warren Buffett, CEO of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), applauded Bank of America’s decision to buy back stock:
“Many of our investees, including Bank of America, have been repurchasing shares, some quite aggressively. We very much like this behavior because we believe the repurchased shares have in most cases been underpriced. (Undervaluation, after all, is why we own these positions.)
“When a company grows and outstanding shares shrink, good things happen for shareholders.”
According to Buffett’s letter, Berkshire owns $5 billion of preferred Bank of America stock, which pays Berkshire $300 million annually. The ownership stake also carries a warrant that expires Sept. 2, 2021, which grants Berkshire the right to buy 700 million BAC common shares for $5 billion. According to Buffett’s letter, the ability to exercise the warrant could net Berkshire a profit of $10.5 billion at the end of this year.
And Buffett says Berkshire could easily pay the $5 billion for the 700 million BAC common shares by using its preferred shares. As such, it would make perfect sense to exercise the warrant, especially given the dividend Berkshire collects.
In that regard, Buffett noted that Bank of America’s annual dividend, currently at 30 cents, could rise some 50% before 2021 (when the warrant expires), topping 44 cents per share.
Bottom Line for BAC Stock
All told, Warren Buffett and Berkshire are in a win-win situation. What’s more, from a valuation perspective, BAC stock — which is priced less-than 12 times fiscal 2018 estimates of 1$2.09 per share — still looks like a bargain compared to peers JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC).
Combined with Bank of America’s cost-cutting strategy and measures to grow revenue on the back of higher interest rates, BAC stock looks like a no-brainer among financials.
That’s something Buffett — who said “undervaluation, after all, is why we own these positions” — hinted at in his letter.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
