Over his several decades of investing, Warren Buffett has
earned his position as one of the most successful investors of
all time. Although the Oracle of Omaha does like to make big bets
on his top picks, he has'ot limited himself to just one company
in the financial sector.
Bank of America
make up major parts of
's investment portfolio. But for average investors, the question
is: Which bank is better for you?
Different companies, different investment
Followers of Buffett know that Wells Fargo has been a
long-term Berkshire Hathaway investment and remains so today.
Having gradually increased its stake over time, Berkshire
Hathaway now owns over 463 million shares of Wells Fargo, or
about 8.9% of the company.
Photo: Alex Proimos. Licensed under Creative Commons
Attribution 2.0 via
The Bank of America investment followed a different route but
found its way to becoming a major part of Buffett's portfolio
nonetheless. As rumors swirled around the bank in 2011 and Wall
Street wondered whether B of A would survive the year, Buffett
made a strategic investment extracting terms no ordinary
investors could get.
For a $5 billion investment, Berkshire would receive $5
billion in Bank of America preferred stock with a 6% cumulative
dividend. And to give Berkshire a chance to benefit from Bank of
America's recovery, Berkshire also received warrants to buy 700
million B of A shares at $7.14 each. Although the B of A
investment was well timed for being greedy when others are
fearful, Buffett noted in Berkshire's 2013 shareholder letter
that the B of A investment was not going to be sold for a quick
We are likely to purchase the shares just before expiration
of our option. In the meantime, it is important for you to
realize that Bank of America is, in effect, our fifth largest
equity investment and one we value highly.
So Buffett has acquired sizable stakes in two major banks
through two very different strategies. Now, let's look at the
dividend aspect of his investments.
Dividends and income
Although Berkshire Hathaway itself doesn't pay a dividend,
Buffett has long collected dividend-paying stocks to provide
income for Berkshire. Today, Wells Fargo can be counted among the
biggest dividend contributors to Berkshire's income, with
Berkshire's stake earning around $650 million annually at the
bank's current dividend rate.
Photo: Ken Teegardin, via
Buffett has also managed to squeeze income out of Bank of
America, with Berkshire's preferred stock earning $300 million in
annual dividends. As an added sweetener to the investment, B of A
has to pay a 5% premium to redeem the shares if it chooses to do
so, something B of A agreed not to do for at least five years in
exchange for making the dividend non-cumulative and therefore
improving the bank's Tier 1 capital ratio.
But remember how Buffett made his investment in B of A on
terms no ordinary investor could hope for? This is what allows
Berkshire to collect a 6% dividend yield and get the upside of
the stock through warrants. An ordinary investor would have to
choose between B of A preferred stock that yields about 6% but
has no common stock upside, or the common stock that yields only
1.3% even after the recent 400% dividend increase.
The yield Berkshire receives from its Wells Fargo stake
corresponds to the yield on the common stock. which currently
sits at 2.8%. While it's not a high yield, it's still more than
twice that of Bank of America's common stock.
So for income and dividend investors, Wells Fargo has Bank of
America beat hands down.
Warren Buffett is at home when it comes to value investing. He
seeks out companies the market undervalues and adds them to
Berkshire's portfolio before other investors react.
Deep value is probably what drove Buffett to Bank of America
in 2011. With Wall Street in panic mode, Buffett could cut an
impressive deal that saw him get both the yield and upside he
But today's Bank of America also looks undervalued, a factor
that may be keeping it in Berkshire's portfolio. The bank trades
at just over 1.0 times tangible book value while trading at 0.67
times book value. Traditionally, healthy major banks trade at a
premium to book value, and even today's Wells Fargo trades at
1.46 times book value.
Bank of America's value has been held down as it has been
dogged by lawsuits, many of which stemmed from its acquired
Countrywide Financial unit. There is also limited trust on Wall
Street for the bank, especially after the revealing of an
accounting error forced the bank to rethink its capital return
However, Bank of America still wins from the value investing
side because of its sharp discount to book value in an industry
where trading above book value is the norm. But B of A investors
should be aware that this value pick does come with the
additional risks of further lawsuits and legacy issues.
The best Buffett pick
Berkshire Hathaway's portfolio is now home to major holdings of
two of the world's largest financial companies. With billions of
dollars invested in both Wells Fargo and Bank of America, Buffett
is clearly bullish on the future of both banks.
But which is better for you? Wells Fargo offers its growth
potential alongside a 2.8% dividend and a track record of solid
performance through the recent financial crisis. At the same
time, Bank of America trades for only two-thirds of its book
value and has the potential for significant capital appreciation
if it can finally settle its legal and legacy issues.
But you don't have to choose just one. If both of these
companies fit with your investment strategy, you could choose to
follow Buffett and buy a piece of both.
Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett
admitted that this emerging technology is threatening his
biggest cash cow. While Buffett shakes in his billionaire
boots, only a few investors are embracing this new market,
which experts say
will be worth over $2 trillion
. Find out how you can cash in on this technology before the
crowd catches on, by jumping on to one company that could get
you the biggest piece of the action.
to access a free investor alert on the company we're
calling the brains behind the technology.
Battle of the Buffett Stocks: Wells Fargo vs.
Bank of America
originally appeared on Fool.com.
owns Bank of America Class B warrants. The Motley Fool recommends
and owns shares of Bank of America, Berkshire Hathaway, and Wells
Fargo. Try any of our Foolish newsletter services
free for 30 days
. We Fools don't all hold the same opinions, but we all believe
considering a diverse range of insights
makes us better investors. The Motley Fool has a
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a