Is Buffett Right about Bank of America (BAC)?

I ask is Buffett right about Bank of America (NYSE: BAC) because Mr. Market has little respect for the monster bank. In fact, Bank of America or BOA shares were trading for $27.07 on 27 March 2019.

However, Buffett admits to owning 9.5% of BOA in his 2018 Berkshire Hathaway (NYSE: BRK.B) shareholder letter. Interestingly, Buffett calculates Berkshire’s Bank of America shares represent $2.096 billion in retained earnings. In addition, Berkshire Hathaway (NYSE: BRK.A) received $551 million in dividends from its BAC shares in 2018.

Thus, Uncle Warren proves you can make a lot of money from Bank of America even if Mr. Market hates it. Under these conditions, many people will ask if Bank of America is a good value investment.

Is Buffett right about Bank of America as a value investment?

Well, Bank of America is cheap when you compare it to other large banks. Notably BOA shares were trading at $27.07 on 27 March 2019.

or instance Wells Fargo (NYSE: WFC) shares were trading at $48.77 and US Bancorp (NYSE: USD) was trading at $48.13 on 27 March 2019. In comparison, Bank of America looks like a a bargain but is it making money?

Currently, Bank of America is making a lot of money. For instance, BOA reports a gross profit of $22.736 billion, an operating income of $9.603 billion, and a net income of $7.278 billion for 4th Quarter 2018. Moreover, Bank of America reports revenues of $22.736 billion and a revenue growth rate of 11.25% for 4th Quarter 2018.

How Much Money is Bank of America Making?

Additionally, Bank of America meets one of my criteria for bank stocks. It is generating a lot of cash. One reason to own bank and financial stocks is because they generate a lot of cash.

Correspondingly, BOA records a financing cash flow of $30.556 billion for 4th Quarter 2018. However, Bank of America reports a negative operating cash flow of -$13.922 billion, a negative investing cash flow of -$24.317 billion, and a negative free cash flow of -$13.922 billion for 4th Quarter 2018.

Strangely, the negative cash flows are not necessarily bad because they indicate Bank of America is devoting of its money to finance – a bank’s primary activity. In addition, financing is making cash at BOA.

New York, Queens, LaGuardia Airport terminal, Bank of America ATM . (Photo by: Jeffrey Greenberg/UIG via Getty Images)

Additionally, Bank of America is a good company because it reports a large gross profit, net income, and operating income despite negative cash flows. This occurs because the negative cash flows represent money Bank of America is lending. That is good because it shows BOA is investing for the future by lending.

Bank of America has an incredible amount of cash

Finally, Bank of America has accumulated an incredible amount of cash through its business. In fact, BOA reported having $446.029 billion in cash and equivalents on December 31, 2018.

All the cash makes Bank of America a value investment because it passes Buffett’s idiot nephew test. To explain, Bank of America is generating so much cash it will survive no matter what stupid things its management might do.

To clarify, the idiot nephew is Buffett’s pet nickname for really stupid managers. Notably, the idiot nephew got his job through nepotism or other connections at the company.

For example, Bank of America has paid $58.4 billion in fines since 2000, Good Jobs First claims. Most of the fines come from abuses and incompetence by Bank of America’s management. However, Bank of America could pay all those fines at once in cash and still have $387.629 billion in cash.

Plus, BOA had $65.814 billion in receivables on New Year’s Eve 2018. To explain, receivables are mortgage, loan, and other payments owed to Bank of America.

Why Too Big to Fail is Good at Bank of America

Another reason why Buffett likes Bank of America is that it is a “too big to fail” to financial institution.

Thus, the federal government will have to bail BOA out during a crisis. Uncle Sam will have to rescue Bank of America to prevent its collapse from triggering a greater financial crisis.

Under these circumstances, Buffett’s investment is safer because the federal government will rescue BOA from the idiot nephew’s incompetence. Notably, the federal government gave Bank of America a $20 billion bailout and a $100 billion guarantee in 2009, Reuters reports.

Moreover, Uncle Sam helped Bank of America pay for its questionable acquisition of the dying brokerage Merrill Lynch & Company. Surprisingly, those funds were on top of $25 billion in Troubled Asset Relief Program money, the US Treasury paid BOA.

Thus, Buffett knows Uncle Sam will protect his investments in too big to fail banks. Hence, average Americans who like to complain about the bailout should take note. There is a way you can profit from government bailouts too, by owning shares of the Too Big to Fail financial institutions.

Is Bank of America a Good Dividend Stock?

Moreover, you will receive dividends on those Bank of America shares.

Specifically, BAC offered a 2.22% dividend yield, a 60₵ annualized payout, and a payout ratio of 23.8% on 27 March 2019. In addition, Bank of America’s dividend has been growing for five years.

Notably, Bank of America’s dividend is small but growing. For instance, BOA shareholders will receive a 15₵ dividend on 29 March 2019. However, that dividend grew by 3₵ in 2018.

In detail, Bank of America paid a 12₵ dividend in May 2018, that grew to 15₵ in September 2018. In contrast, Bank of America’s dividend grew by 5.5₵ in 2017, rising from 7.5₵ in June 2017 to 12₵.

Bank of America is not for Everybody

Thus, Bank of America is capable of steady dividend growth. Those looking for a good cheap and reliable dividend stock should investigate Bank of America.

This troubled financial institution, is growing and paying a nice dividend. In the final analysis, Warren Buffett is right about Bank of America (NYSE: BAC).

On the other hand, Bank of America is not for everybody. In particular, those whom BOA’s ethics disgust.