A lot of time has passed since Warren Buffett first bought $5 billion of Bank of America (NYSE:BAC) preferred stock in August 2011. The BAC stock he bought paid 6% interest and was convertible into 700.3 million shares of common shares anytime before September 2021.
Berkshire Hathway (NYSE:BRK.A, NYSE:BRK.B) converted the warrants in the third quarter of 2017, using its interest payments from the deal to foot the bill.
Buffett’s investment in BAC netted Berkshire approximately $1.8 billion in interest payments over the six years it held the preferred Bank of America stock; the 700 million shares are now worth $18.6 billion, a compound annual growth rate of 19.9% through May 31.
Since Berkshire converted the preferred stock, it’s acquired almost 200 million additional shares of Bank of America stock and now holds slightly less than 900 million shares of BAC stock.
Warren Buffett and Berkshire shareholders have benefited from Berkshire’s ownership of BAC stock. Although Berkshire looks poised to hold its Bank of America stock for the long-haul, as it’s one of BRK’s five largest positions, regular investors ought to be careful about buying Bank of America stock. Here’s why.
Warren Buffett Can Hold Onto BAC Stock During Storms
At the end of fiscal 2018, Berkshire’s equity portfolio had a market value of $172.8 billion, with close to $70 billion in net unrealized gains. If it were an S&P 500 company, it would be the 32nd largest by market cap.
The company has the luxury of riding out storms like the current one Bank of America faces due to the U.S.-China trade war.
InvestorPlace columnist Josh Enomoto recently discussed the macroeconomic issues facing Bank of America. He isn’t optimistic about the bank’s ability to thrive in this environment. Neither am I.
“To gamble on BAC stock here is to dismiss that shares have had almost a 100% correlation with geopolitical headlines…” Josh wrote in an article published on May 30.
“… If China can’t come to the negotiating table, then the trade war goes on. And with that, BAC stock goes nowhere but down,” he added.
What Josh is referring to is President Trump’s inability to respect the Chinese way of doing business. The president can’t offend the entire nation and expect China president Xi to come rushing back to the negotiating table.
As a result, big institutions such as Bank of America that depend on global banking are stuck in neutral.
All of the big banks are currently facing significant headwinds when it comes to trading and investment banking. If a global recession occurs as a result of the trade war, U.S. retail banking will also experience negative catalysts, as consumers begin to suffer.
The Bottom Line on BAC Stock
Bank of America stock is having a mediocre year, as BAC stock price has risen 10.6% in 2019 , about the same as the S&P 500.
When Bank of America reported its first-quarter earnings in April, CFO Paul Donofrio estimated that its net interest income would grow by just 3% in 2019, versus 6% in 2018, due to lower interest rates and a slowing economy.
So, while BAC continues to generate record quarterly profits and the economy seems to be holding up, the future looks a lot less attractive for the big banks than the past year or two.
If you can afford to hold BAC stock for the long haul as Warren Buffett can, I don’t think there’s any reason to sell the shares at this point, despite the black clouds hanging over the big banks. If you can’t wait out the short-term, trade-related volatility, though, owning Berkshire stock is a good Plan B.
If you don’t own BAC stock but are considering it, I’d wait for BAC stock price to hit the lower $20s before pulling the trigger.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
