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Rupert Hargreaves
Rupert Hargreaves
Articles (652)  | Author's Website |

What Does Warren Buffett See in Bank of New York Mellon?

Berkshire Hathaway raised stake by 52% in last quarter

September 28, 2017 | About:

Last quarter, Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) increased its stake in Bank of New York Mellon (NYSE:BK) by 52% to $2.6 billion, making it one of the largest portfolio movements Berkshire made during the quarter.

Buffett has owned the Bank of New York for some time, and this sizable increase signals that he believes the bank is heading in the right direction. And he’s not alone. Buffett is investing alongside Nelson Peltz and a selection of other value fund managers, all of whom have devoted a significant percentage of their portfolios to the company.

So what’s to like about Bank of New York?

What’s to like?

The Bank of New York is a standout performer in the banking sector. Unlike other banks such as Bank of America (NYSE:BAC) and Citi (NYSE:C), it operates as a custodian bank that holds assets for institutional clients and provides the back-end accounting services to keep everything running smoothly. This means that customers tend to be sticky and highly loyal because billions of dollars of assets to another custodian is no easy task.

For this reason, the bank is also forced to provide an excellent service to loyal customers. Indeed, one of the features it can offer is a low cost because it benefits from a scale that enables it to manage its clients' assets at a price other banks would struggle to match. The bank has been voted the fourth best in the U.S. for customer service.


Another unique trait of the bank is that it does not make loans to customers, around 80% of revenue comes from fees so in many ways, rather than being a bank, it is a service company a service company with a highly loyal customer base.

The biggest fish in the sea

With more than $30 trillion of assets under custody, Bank of New York has the scale to provide support to customers at a much lower cost than can be done anywhere else. Moreover, as the company is a specialist, it has a better institutional understanding of how to comply with a changing regulatory environment. Herein lies the business' moat. Bank of New York has scale, specialist operators and a strong reputation behind it, all of which are qualities Buffett loves to see in a business.

BNY Mellon's fiscal year 2016 saw total revenue rise slightly from $15.19 billion to $15.24 billion while earnings per share rose to $3.15 from $2.71. Return on tangible common equity was 21% for the year. Total assets on the bank's balance sheet ended the year at $333 billion while assets under management stood at $1.7 trillion, and assets under custody came in at an all-time high of $30 trillion.

From a fundamental perspective, this bank has it all. Reported earnings per share have grown at a steady 9.2% per annum for the past six years, and book value has compounded at 1.1% per annum. Share repurchases have helped drag the average number of shares in issue down from 1.22 billion for 2011 to 1.06 billion at the end of the second quarter, an annual decline of 2.6%. Book value per share has increased by 4% per annum since 2011.

The one downside is valuation. Bank of New York trades at a forward price-earnings (P/E) of 13.8 and price-book (P/B) value of 1.5, which is hardly cheap, but it’s around average for the banking sector.

Still, the valuation is justifiable considering Bank of New York’s strengths, stable income and steady cash returns. Unlike other banks, it is not dependant on interest rates to improve profits and another financial crisis, or rise in loan write-offs shouldn’t impact the group as much as its sector peers.

It’s quite clear why Buffett is so confident about the bank’s outlook.

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

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