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Buffett Continues to Trim BAC Stake: Should You Sell the Stock?
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Warren Buffett keeps selling Bank of America (BAC - Free Report) stock. After a hiatus of some days, the Oracle of Ohama has resumed cutting stake and now owns 12% in one of the biggest American lenders.
Per a Form 4 filing with the Securities and Exchange Commission yesterday, Berkshire Hathaway (BRK.B - Free Report) sold almost 14 million (in total) BAC shares for three straight trading days. Berkshire now holds 928.5 million shares of Bank of America.
Buffett has been an active seller of Bank of America stock, unloading shares for 12 consecutive trading sessions ending Aug 1. During this time frame, 90.4 million BAC shares were sold.
Despite this sell-off, Buffett remains the biggest stakeholder in the bank. At the end of the second quarter of 2024, roughly 73% of Berkshire’s stake remained concentrated in only five stocks – Apple (AAPL - Free Report) , Bank of America, American Express (AXP - Free Report) , Coca-Cola and Chevron (CVX - Free Report) .
Many investors follow Buffett and try to match his investing style. He has been a long-time investor in Bank of America and bought the stock for the first time in the second quarter of 2007. Hence, the sale of BAC shares has resulted in scrutiny of the banking sector, specifically the stock.
The development weighed on the BAC stock performance. The company’s shares are down more than 10% since the day before Berkshire’s sale began. It must be noted that before the stake sale was revealed, the BAC stock was trading near its two-year high and was among the best-performing banks on the S&P 500 Index.
Now, the question arises: should the investor follow Buffett’s move and sell Bank of America shares or pile up more at the current levels?
BAC Stock Overvalued, Underperforms Sector
Bank of America stock is currently trading at the 12-month trailing price-to-tangible book (P/TBV) of 1.59X. This is above the industry’s 2.07X and higher than the median of 1.59X, reflecting a stretched valuation.
Further, the Value Score of C suggests that BAC is overvalued at the moment.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Investors could face downside risks if the company's future performance does not meet expectations. The banking industry is still on shaky grounds. A tough landscape marked by economic slowdown, increased regulatory scrutiny, higher rising delinquency rates, concerns related to commercial real estate loans and persistent inflation woes could hinder BAC’s growth trajectory.
In terms of performance, Bank of America shares have gained 17.8% year to date, underperforming the industry’s growth of 19.4%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest weak performance for BAC. The stock trades below its 50-day moving average, signaling a bearish trend.
BAC Shares Trade Below 50-Day Moving Average
Image Source: Zacks Investment Research
Factors Supporting the BAC Stock
Rate Cut Expectations: The Federal Reserve chairman, Jerome Powell, has signaled that the central bank is inching closer to cutting interest rates. Now, interest rates are at a 23-year high of 5.25-5.5%, acting like a double-edged sword for the banks. While high rates have led to a significant jump in net interest income (NII), they have driven up funding and deposit costs, thus squeezing banks’ margins.
For Bank of America, which is highly sensitive to interest rates, lower interest rates will be a boon and support net interest margin (NIM) expansion. The company’s NIM performance has been subdued for the last several quarters. Management thinks that in terms of its second-quarter NIM of 1.93%, it is under-earning. The metric is “going to go up over time. It'll go up as net interest income goes up,” with the normal figure being 2.3%.
Branch Opening: Bank of America has embarked on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets.
Bank of America also remains committed to providing modern and technologically advanced financial centers through its ongoing renovation and modernization project. Over the past three years, it has been renovating and upgrading its existing financial centers across the country, with more than 2,500 centers renovated. This created offices and meeting spaces for clients to engage with financial specialists and ensured a consistent and modern experience across all centers. These initiatives, along with the success of Zelle, will enable the company to improve digital offerings and cross-sell several products and services.
Technology: Digital solutions are the need of the hour, and Bank of America continues to deliver innovative digital solutions, particularly through its digital banking capabilities. This helps it attract and retain customers and boost cross-selling opportunities The consumer mobile banking app now serves more than 47 million active users, and roughly 23 million consumers use Zelle, which has become a dominant way to move money. In the wealth management division, almost 87% of its global banking clients are digitally active, and the company’s CashPro platform uses AI to streamline service requests. BAC plans to continue strengthening its technology initiatives and spend heavily on these.
Fortress Balance Sheet and Solid Liquidity: Bank of America’s liquidity profile remains solid. As of Jun 30, 2024, average global liquidity sources were $909 billion. Also, the company’s investment-grade long-term credit ratings of A1, A- and AA- from Moody’s, S&P Global Ratings and Fitch Ratings, respectively, and a stable outlook allow easy access to the debt market.
Hence, BAC continues to reward shareholders handsomely. After it cleared the 2024 stress test, the company announced an increase in its quarterly dividend by 8% to 26 cents per share. In the last five years, it increased dividends five times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio sits at 29% of earnings.
Additionally, in July, the company authorized a $25 billion stock repurchase program, effective Aug 1, to replace the previous program, which had $6.7 billion left for repurchase as of Jun 30, 2024.
Bullish Analyst Sentiments
Analysts seem to be bullish about Bank of America’s prospects. Over the past 30 days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
This upward adjustment, though small, reflects a positive sentiment among analysts and suggests encouraging prospects.
Parting Thoughts
Bank of America's global presence, diversified revenues, branch openings and technological innovations to attract and retain customers provide a solid base for organic growth. However, challenges like high interest rates, subdued loan demand because of the economic downturn, higher regulatory capital requirements as part of the Basel 3 end-game and uncertain macroeconomic backdrop cannot be ignored.
Also, BAC's premium valuation raises concerns about sustainability, especially amid economic uncertainties and other challenges. Investors should consider these factors carefully and evaluate their risk tolerance before buying this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term.
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Buffett Continues to Trim BAC Stake: Should You Sell the Stock?
Warren Buffett keeps selling Bank of America (BAC - Free Report) stock. After a hiatus of some days, the Oracle of Ohama has resumed cutting stake and now owns 12% in one of the biggest American lenders.
Per a Form 4 filing with the Securities and Exchange Commission yesterday, Berkshire Hathaway (BRK.B - Free Report) sold almost 14 million (in total) BAC shares for three straight trading days. Berkshire now holds 928.5 million shares of Bank of America.
Buffett has been an active seller of Bank of America stock, unloading shares for 12 consecutive trading sessions ending Aug 1. During this time frame, 90.4 million BAC shares were sold.
Despite this sell-off, Buffett remains the biggest stakeholder in the bank. At the end of the second quarter of 2024, roughly 73% of Berkshire’s stake remained concentrated in only five stocks – Apple (AAPL - Free Report) , Bank of America, American Express (AXP - Free Report) , Coca-Cola and Chevron (CVX - Free Report) .
Many investors follow Buffett and try to match his investing style. He has been a long-time investor in Bank of America and bought the stock for the first time in the second quarter of 2007. Hence, the sale of BAC shares has resulted in scrutiny of the banking sector, specifically the stock.
The development weighed on the BAC stock performance. The company’s shares are down more than 10% since the day before Berkshire’s sale began. It must be noted that before the stake sale was revealed, the BAC stock was trading near its two-year high and was among the best-performing banks on the S&P 500 Index.
Now, the question arises: should the investor follow Buffett’s move and sell Bank of America shares or pile up more at the current levels?
BAC Stock Overvalued, Underperforms Sector
Bank of America stock is currently trading at the 12-month trailing price-to-tangible book (P/TBV) of 1.59X. This is above the industry’s 2.07X and higher than the median of 1.59X, reflecting a stretched valuation.
Further, the Value Score of C suggests that BAC is overvalued at the moment.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Investors could face downside risks if the company's future performance does not meet expectations. The banking industry is still on shaky grounds. A tough landscape marked by economic slowdown, increased regulatory scrutiny, higher rising delinquency rates, concerns related to commercial real estate loans and persistent inflation woes could hinder BAC’s growth trajectory.
In terms of performance, Bank of America shares have gained 17.8% year to date, underperforming the industry’s growth of 19.4%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest weak performance for BAC. The stock trades below its 50-day moving average, signaling a bearish trend.
BAC Shares Trade Below 50-Day Moving Average
Image Source: Zacks Investment Research
Factors Supporting the BAC Stock
Rate Cut Expectations: The Federal Reserve chairman, Jerome Powell, has signaled that the central bank is inching closer to cutting interest rates. Now, interest rates are at a 23-year high of 5.25-5.5%, acting like a double-edged sword for the banks. While high rates have led to a significant jump in net interest income (NII), they have driven up funding and deposit costs, thus squeezing banks’ margins.
For Bank of America, which is highly sensitive to interest rates, lower interest rates will be a boon and support net interest margin (NIM) expansion. The company’s NIM performance has been subdued for the last several quarters. Management thinks that in terms of its second-quarter NIM of 1.93%, it is under-earning. The metric is “going to go up over time. It'll go up as net interest income goes up,” with the normal figure being 2.3%.
Branch Opening: Bank of America has embarked on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets.
Bank of America also remains committed to providing modern and technologically advanced financial centers through its ongoing renovation and modernization project. Over the past three years, it has been renovating and upgrading its existing financial centers across the country, with more than 2,500 centers renovated. This created offices and meeting spaces for clients to engage with financial specialists and ensured a consistent and modern experience across all centers. These initiatives, along with the success of Zelle, will enable the company to improve digital offerings and cross-sell several products and services.
Technology: Digital solutions are the need of the hour, and Bank of America continues to deliver innovative digital solutions, particularly through its digital banking capabilities. This helps it attract and retain customers and boost cross-selling opportunities The consumer mobile banking app now serves more than 47 million active users, and roughly 23 million consumers use Zelle, which has become a dominant way to move money. In the wealth management division, almost 87% of its global banking clients are digitally active, and the company’s CashPro platform uses AI to streamline service requests. BAC plans to continue strengthening its technology initiatives and spend heavily on these.
Fortress Balance Sheet and Solid Liquidity: Bank of America’s liquidity profile remains solid. As of Jun 30, 2024, average global liquidity sources were $909 billion. Also, the company’s investment-grade long-term credit ratings of A1, A- and AA- from Moody’s, S&P Global Ratings and Fitch Ratings, respectively, and a stable outlook allow easy access to the debt market.
Hence, BAC continues to reward shareholders handsomely. After it cleared the 2024 stress test, the company announced an increase in its quarterly dividend by 8% to 26 cents per share. In the last five years, it increased dividends five times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio sits at 29% of earnings.
Additionally, in July, the company authorized a $25 billion stock repurchase program, effective Aug 1, to replace the previous program, which had $6.7 billion left for repurchase as of Jun 30, 2024.
Bullish Analyst Sentiments
Analysts seem to be bullish about Bank of America’s prospects. Over the past 30 days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
This upward adjustment, though small, reflects a positive sentiment among analysts and suggests encouraging prospects.
Parting Thoughts
Bank of America's global presence, diversified revenues, branch openings and technological innovations to attract and retain customers provide a solid base for organic growth. However, challenges like high interest rates, subdued loan demand because of the economic downturn, higher regulatory capital requirements as part of the Basel 3 end-game and uncertain macroeconomic backdrop cannot be ignored.
Also, BAC's premium valuation raises concerns about sustainability, especially amid economic uncertainties and other challenges. Investors should consider these factors carefully and evaluate their risk tolerance before buying this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term.