This year Warren Buffett is buying a stock; should you also be buying?
When it comes to stocks and investment, Warren Edward Buffett is a name that cannot be avoided. This 90 something-year-old American has shown the world the power of investment and how you can become a billionaire from it. If you are yet to know about this man, then you can search him on the net. You can also find out about him in my post, ‘How Warren Buffett became a millionaire’.
Hello and welcome, I am still your host. Today I will be giving you insight on what the investor king Warren Buffett is buying and giving you my opinion on whether it is also worth buying. Remember that this is just my opinion, so don’t be stuck on it. All values recorded here are accurate for the first week full week of August 2020. If you are not subscribed yet, then all I can say is you are missing out a lot.
If you are a first-timer to investment and you want some advice check out my previous blogs. Making these blogs is a passion for me and sharing with you my experience, opinion and knowledge is one thing I am dedicated to. However, I won’t be pulling through if you don’t show me your love and support by commenting and sharing my blogs. I hope you do. Okay, let’s begin.
Who is Warren Buffett?
I won’t go in-depth about this man; you can always find out his story from my post, as mentioned earlier. But he is an entrepreneur, an investor, a philanthropist, the founder and owner of the investment firm Berkshire Hathaway. He is a billionaire with a recent net worth of 71.8 billion dollars, making him the 6th richest man in the world; that’s a lot to say.
What is he buying?
Earlier this year during the pandemic wave, a lot of investors noticed that Buffett was not buying any stock at all. He was just so quiet, and people were somewhat confused. But somewhere in the middle of July 2020, he began buying again, and you can imagine the shock people experienced. But the biggest shock was how much he was buying this stock. And as at the 5th of August, he had spent over 2.1 billion dollars buying the company shares.
This means that he has just under 12% of the company shares in his pocket. According to financial reports for twelve days, consecutively Warren Buffett has been buying the stocks. What is this amazing stock then that he is investing so much on? Well, it’s none other than the Bank of America. Between the 31st of July and the 4th of August, Berkshire Hathaway bought 13.6 million shares of the bank for a sum of $337 million.
Before this from the 20th of July the company who also has affiliations with the bank, and several other banks such as Wells Fargo, Chase & Co and JP Morgan had already bought over 85 million shares of the BoA Bank of America. In total, as at the 5th of August, the company already had more than 1 billion of BoA shares which is just under 12% of the total shares and amounts to $25.8 billion in value.
How long has this buying been planned, and would it continue?
From my research, it seems that Buffett has been planning this purchase for a long time to come. Naturally, to own shares in a bank as big as BoA, you can’t go beyond 10%, which is the Federal Reserve’s rule. Honestly, an average investor won’t even be able to get to 10% of any major bank stocks because of how much it costs. Anyways anything above 10% and the buyer must become a bank holding company. Now Warren Buffet in April got approval from the Federal Reserve’s bank of Richmond to have his company’s stock buying limits increased.
Again naturally Berkshire Hathaway gets the 10% limit, but in April they were approved to get up to 24.9%. So yes there is a whole lot of room for Buffett to be buying this stock in the future. But they didn’t just begin buying the stock. As I said earlier, they have had a lot of affiliation with the bank, and in 2011 they first purchased 700 million shares. The returns they had were massive because then the company’s stock price was low and many feared for the future of the company. But the question now is why is he buying so much of the company?
What is so special about this BoA?
I am a Berkshire fan, and of course, I have a position in the company because it’s just a great company, but I wonder if I should be following in the path of this great man in his newfound love for BoA. On the 8th of August Berkshire is expected to release their financial statement for the 2nd quarter and you know of course that it will be good. BoA is a bank that has had a great history, and there is a lot you can say for and against this bank, but that’s not what I am looking at. Their stock value is great as at the 6th of August it sold at $25.40 per share. In 2006 the bank sold at over $50 and in 2011 when Buffett first bought they sold for under $10.
Between the end of 2019 and just before the pandemic wave it sold for well over $30. All this isn’t so much of a solid reason for buying the shares. Let’s take a lot at their financials; they have a market cap of over $219 billion, which is a lot. Their PE ratio is 12.22; their forward earning is 0.72, their dividend payout has been good with a steady rise. From 2016 they were paying out 5 cents, and in 2017 it rose to 7.5 cents. 2018 saw 15 cents, 2019, 18 cents and now in 2020, they are still at 18 cents.
Now let’s look at their financial report. This was released in July 2020, so it’s exceedingly fresh. It made an earning of $3.5 billion or 32 cents per share. Now, this was a lot higher than the expected 27 cents per share that many analysts and investors had thought they would get, while their revenue sat at $22.5 billion. Looking at all these you can tell that BoA is a good enough company with lots of strong points but here is the thing, I am going to lay out the pros and cons of things right now for us to decide if investing in Warren Buffett’s present investment will be good or bad.
Pros and Cons of BoA
We will begin with the pros and work our way over to the cons.
Pros
- The company has experienced a stable and firm revenue within the past few years.
- They have survived exceptionally well even with the pandemic, which shows that they have a strong business root.
- Their last report showed a dividend yield of nearly 3%, which is exceptionally good for any company at all. There are, of course, companies with higher yields, but they are not as stable as this.
- One thing you can notice is how safe the company is. The risks are low, the rewards are not fantastic, but they are a safe bet.
- A pro in itself is that Warren Buffett is buying this stock. You should base your purchase on anyone, but let’s be realistic if an experienced investor like him is going for this company then the reward has to be greater than the risk.
- Again to back up my safe point, this is a government-supported company, so you know that there is so much assurance for a long term survival for the company.
Cons
- First, the company isn’t showing substantial growth. Yes, they had a good result in the last report but looking at the past few years the economy, as well as the company itself, has not been doing so well in terms of growth. It is stable, but it’s not growing.
- There is no innovation or diversification seen for the company. In the last few years, there hasn’t been any branching out, which I believe is an important point for any business. I understand that there isn’t much expansion available for the banking sector, but still, it’s been too stiff.
- By virtue of it being a bank, its balance sheet is going to be scattered and all over the place, which is a risky point.
- Again by virtue of it being a bank, there will be a limitation to the PE ratio. So if other companies and the market, in general, is seeing a 10 in the PE ratio, you will receive as low as a 6 just because you have a bank stock.
Conclusion
In the end, I think you can make your decision on whIch side to take with this bank. For me, I’d probably be buying maybe not so much but I will. What is your view, and what would you be doing at this time? Let me know in the comment section. Again if you have not subscribed, you are missing out. Also, support me by liking this post.
