According to regulatory filings, Warren Buffett (Trades, Portfolio) increased Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) investment in Bank of America (BAC, Financial) earlier this week by $800 million, or approximately 34 million shares.
After this increase, Buffett now owns 11.3% of the bank with a holding worth $24.1 billion.
This is one of the most substantial moves Buffett has made from the start of the Covid-19 crisis (that we know of). It seems to suggest that Buffett has become more open to deploying some of Berkshire's massive cash pile now that we have more information on the pandemic and how it might impact the economy.
We know that Buffett increased Berkshire's holding in Bank of America because the conglomerate already owns more than 10% of the lender. Any group that owns more than 10% of a stock is required to report all transactions. That's also why we knew Buffett was selling the airlines before it was fully revealed - he had to report the transactions in Delta (DAL, Financial) as he owned more than 10%.
We could see the same scenario this time around. We only know Buffett has been buying more of Bank of America because he is required to report it earlier than the normal quarterly filings. We'll have to wait for Berkshire's 13F to find out what else the Oracle was doing in the three months through June.
Buffett's favorite bank stock
Bank of America has overtaken Wells Fargo (WFC, Financial) as Buffett's favorite banking stock in the past decade. Berkshire's holding in the bank dates back to 2011 when Buffett was offerred $5 billion in the form of preferred stock.
At the time of the deal, Buffett said he wanted to invest in the banking giant because:
"I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."
In 2017, Berkshire swapped its preferred stock for 700 million common shares. Buffett has continued to add to the position ever since. During 2018, Buffett increased his stake by over 30%, or $6.65 billion, and further deals were placed throughout 2019.
It looks as if Buffett is sticking to his strategy in 2020. So far, it's proved highly lucrative. In December 2019, Motley Fool author Billy Duberstein calculated that Berkshire had earned a total of $22.8 billion in capital gains and income on its Bank of America investment. That was at a share price of around $35, so Berkshire's total return has slipped since then.
Still, even at this lower level, Bank of America seems to have been a multi-bagger for Berkshire since its first investment in 2011.
Even including the Covid-19-related loan losses and lower returns from lower interest rates expected in the future, the bank appears to continue to exhibit the qualities that initially attracted Buffett. It has a strong franchise and balance sheet, as well as high returns on invested capital. The same cannot be said for Buffett's former favorite Wells Fargo, which is clearly struggling right now.
Interestingly, in 2016, the Oracle ran up against the 10% ownership level with Wells. Berkshire applied to be allowed to increase its stake above 10% but was told that doing so would limit the group's ability to do business with the lender. We do not yet know if there is a similar case with Bank of America.
Disclosure: The author owns shares in Berkshire Hathaway and Wells Fargo.
Read more here:
- Investment Lessons from Jesse Livermore
- What We Can Learn from Carl Icahn's Wall Street Career
- Some Thoughts on Why Warren Buffett Missed the Market Crash
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