Do falling stock prices make great buying opportunities? Like most things in life, it depends. A stock with a proven track record and excellent prospects that is falling based on short-term external headwinds — well, that sounds like a bargain buying opportunity to me.
Add a juicy dividend and a huge thumbs-up from Warren Buffett, and I think you’ve found a great candidate for your portfolio.
With that introduction, let’s talk about Bank of America (NYSE: BAC) and why you might want to buy the stock right now.
Buffett’s favorite bank
Bank of America accounts for 10.6% of the Berkshire Hathaway investment portfolio, its second-largest position behind Apple.
Bank of America is a classic Buffett stock. It has a strong consumer-facing business and plays a large role in the U.S. economy. It has tons of cash (one reason Buffett loves bank stocks) and varied revenue streams from its diverse business.
Ever on the lookout for undervalued stocks, Buffett invested in Bank of America after the financial crisis in 2011 when it was struggling. BofA stock might still be undervalued: It trades at a price-to-tangible-book-value of 1.6, which is below many similar banks.
Why Bank of America stock is down right now
Despite all of Bank of America’s wonderful qualities, the stock is down 16% from its highs. Revenue and net income are down from last year, and return on tangible common equity (ROTCE) declined from 17.4% last year to 12.7% this year in the 2024 first quarter.
Some of that was due to charges related to the collapse of several banks last year. And some of that is related to higher interest rates.
All banks are operating in a pressured environment right now. Many companies are feeling the impact of inflation and high interest rates, but banks feel it acutely because it affects their business so directly. High interest rates mean fewer loan approvals, higher default rates, and higher interest paid on retail deposits.
There are positive elements, such as higher interest on loans. But a strained economy means less money going around, and that’s the heart of a bank’s business. That’s exactly the point of the Federal Reserve’s monetary policy right now: to put the brakes on a soaring economy and bring down inflation.
There have been many recent wins at BofA that illustrate its resilience and how it’s leveraging the current macroeconomy to build its business and position itself for the long term. It added 245,000 new consumer accounts in the first quarter and more than 1 million credit cards, plus 29,000 accounts in global wealth and investment management. It’s also taking market share in global banking, with 25% more accounts year over year in the first quarter.
Expenses increased at a lower rate than inflation due to stringent cost management, and net interest income came in at $14.2 billion, exceeding it projections.
That’s why I’m calling this a short-term external headwind. BofA has a well-run, consumer-facing business with many revenue streams and lots of cash. When interest rates fall, the business should improve, and the stock should rise.
BofA’s excellent dividend
Bank of America pays a growing dividend that yields 2.4% at the current price, well above the S&P 500 average. It has been raised annually for about 10 years, since the bank’s recovery from the financial crisis, and has increased a whopping 2,300% over that time. It’s in an excellent financial position right now, and the current challenging economy isn’t putting a dent in its dividend.
Bank of America is a strong company with an excellent dividend, and now is a great time to buy shares and hold them forever.
Should you invest $1,000 in Bank of America right now?
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
1 Magnificent Dividend Stock Down 16% to Buy and Hold Forever was originally published by The Motley Fool
