Warren Buffett, who made a killing on Bank of America (NYSE:BAC) warrants during the crisis of the Great Recession, is putting more of his money to work there, which suggests that Bank of America stock keeps earning his confidence.
Buffett’s Berkshire Hathaway (NYSE:BRK.A) owned 950 million shares of Bank of America stock at the end of the last quarter, up over 50 million from a previous filing, making it the bank’s biggest shareholder with a stake of 10%. Bank of America also bought back $6.5 billion of its shares during the quarter.
While Bank of America has been very, very good for Buffett, the stock may not be great for investors seeking capital gains. The shares are down slightly over the last year. But if you’re looking for income the 18-cent-per-share dividend on Bank of America Stock yields 2.34% and that payout is up from 12 cents per share two years ago, well supported by dividends.
Bank of America recently reported a good second quarter that did take the stock over its level of last July. Net income was $7.3 billion, 74 cents per share, on revenue of $23.1 billion.
The stock’s not doing better because interest rates remain low and it’s expected that the Federal Reserve will soon lower them further. In its earnings report, Bank of America predicted its net interest income will rise just 1% assuming two rate cuts. But it continues to increase its operating leverage, which should mean future dividend increases.
The bank manages this trick through automation. It has cut 100,000 jobs over the last decade, creating mobile apps that let customers make deposits and check balances without visiting a branch. The number of its mobile banking users were up 10% in the second quarter, said CEO Brian Moynihan.
Analysts like the story and KBW recently upgraded the bank’s stock to outperform, predicting a return of over 20%.
Digital Banking and BAC Stock
But digital banking is a business a lot of people want.
With First Data now merged into Fiserv (NASDAQ:FISV), it ended its merchants service agreement with the bank, effective next year. The press release on the split was filled with happy talk, but essentially Fiserv believes it can handle First Data’s processing business without Bank of America’s help.
Digital processing reduces the need for bankers or bank branches while imposing technology debt on any bank with older, more expensive processing equipment. It also opens the market to start-ups like Square (NASDAQ:SQ), which has transformed the payments business by combining transaction processing with other services like loans and accounting.
Digital banking lets competitors come into the U.S. market from anywhere, even Europe, with competitive offerings. But digital banking also increases security risks, as shown by the recent breach at Capital One (NYSE:COF) impacting 100 million accounts.
Bank of America has responded by increasing its capital budget, adding things like digital debit cards to its mobile app. It is exploring blockchain, to the point where critics in the crypto-currency world have accused it of being a patent troll.
The Bottom Line on Bank of America Stock
Bank of America remains a good stock for conservative investors like Warren Buffett because it continues investing in technology and its brand name.
As digital banking growth slows amid greater competition, it could also consolidate. Expect Bank of America, with a market cap of $285 billion, second in the industry only to JPMorgan Chase (NYSE:JPM), to be one of those consolidators.
Just don’t expect spectacular returns. Sellers in mergers get the biggest paydays, and when mergers happen Bank of America will be a buyer. If it can maintain security and keep moving forward this will remain a good stock for income investors. It’s your daddy’s bank.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.