Shares of Bank of America Corp (BAC, Financial), Warren Buffett (Trades, Portfolio)’s largest bank holding, plunged more than 4% to $38.10 in early trading on Wednesday:
The stock’s fall came on the heels of Bank of America reporting disappointing results for its second quarter of 2021. JPMorgan Chase (JPM, Financial) and Goldman Sachs (GS, Financial) both reported results that beat expectations, which makes Bank of America’s numbers seem even more lackluster.
Earnings headwinds
Facing headwinds from continued record-low interest rates as well as a drop in fixed income trading operations, Bank of America reported revenue of $21.6 billion for the quarter, down from $22.3 billion in the year-ago quarter and falling short of analyst estimates of $21.8 billion.
Meanwhile, earnings per share came in at $1.03 on a GAAP basis, or 80 cents on an adjusted basis, excluding a one-time $2 billion tax benefit. Analysts had called for adjusted EPS of 77 cents. This was a significant improvement from the adjusted EPS of 37 cents reported in the prior-year quarter.
Bank of America said that its revenue drop was primarily the result of a 6% decline in net interest income due to lower interest rates. Trading revenues were also much lower than expected. While an industry-wide decline was projected in this regard, Bank of America seems to have underperformed, with fixed income trading operations generating only $1.97 billion in revenue, well below the $2.71 billion estimate of analysts surveyed by FactSet.
Dividend growth
A bright spot for Bank of America’s investors is that, following a successful round of stress tests in June, banks are once again allowed to increase their dividend payments.
On June 28, Bank of America announced that it would be increasing its quarterly stock dividend by 17% to 21 cents per share starting in the third quarter of 2021.
Buffett’s favorite bank
Representing 14.45% of Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) $270.44 billion equity portfolio, Bank of America is the favorite bank holding of Warren Buffett (Trades, Portfolio). The firm owns 1,010,100,606 shares of the bank, representing 11.79% of shares outstanding. It is Berkshire's second-largest equity position after Apple (AAPL).
Given Buffett’s confidence in the bank, some investors may consider the pullback to be a buying opportunity. Peers like JPMorgan and Goldman Sachs were helped along by strong revenue from Wall Street advisory activities, but they were also facing the same headwinds as Bank of America. Due to negative investor sentiment now, Bank of America has the potential to report higher share price gains when interest rates are eventually hiked again.
The pullback brings the stock closer to the value range, though the GuruFocus Value chart still rates the stock as “modestly overvalued.” It has enjoyed a strong run so far this year and is now trading at a price-earnings ratio of 16.26, which is above its 10-year median price-earnings ratio of 15.18 and the industry’s median of 12.
However, with low interest rates set to continue for at least the next couple of years, there could be further short-term price declines in the cards for Bank of America’s stock, especially if high activity on Wall Street continues to make other bank majors look good in comparison. Better buying opportunities could very well present themselves later on in the year.
