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  Banking on America

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR


Friday, November 9, 2018

With the market still in the throes of despair from 2008’s epic plunge, we acquired Bank of America at $6.76 (all amounts in USD) in 2011. Very soon after, Warren Buffett announced he was also a shareholder in the venerable institution.

While we purchased the common shares, the Oracle of Omaha bought preferreds and warrants, which has worked out well for him. Our deal also appears to be a major win, with the shares trading around $28 even after a drop of more than 10 percent during the recent market tumult.

Of course, we did not invest $5 billion as the sage of value investing did. Truth be told, our accounts simply don’t hold that kind of lucre. Alas, nor will they tomorrow.

One reason this investment was a favourite of ours, and we acknowledge that the logic can be perceived as simplistic, is that this is the Bank of America. Failure with a name would have been a blow to the republic’s ego. Being the self-defined “greatest country in the world” is of major importance to our neighbours, and if your namesake bank (established in 1874) topples, that would be a definitive chink in the armour.

When we procured the stock, the dividend was a paltry penny a quarter. It was easy to be confident that, if the bank recovered, that token would increase. And it has, four times, to the current payout of 15 cents. Before the 2008 blowout, the quarterly dividend was 64 cents, and while that height is unlikely to be scaled again, given that the share count has more than doubled in the past decade, further escalations are likely.

From this angle, the US economy appears to be heading into turbulent waters. The country is stacking major-league debt on top of a gigantic pile that it can ill afford, especially with interest rates nudging up. While the rich get richer, a huge swath of the populace is not getting ahead or is doing worse.

In our minds, it is the people in the middle class and toward the bottom who drive an economy — when they gain disposable income, they tend to spend it.

Plus, the US banking system seems to face major challenges every couple of decades or so. Certainly, some of this is because of recessions, but much of the damage is internally inflicted, as higher returns are chased during the go-go times. That often turns out to be a mistake.

Ultimately, when the economy does turns south, banks will have their problems. Bank of America will not be immune, but if Brian Moynihan continues to guide the ship, his stewardship should diminish the damage. He has been chief executive since 2010 and chair since 2014; at 58 years of age, he should have some mileage left in his career. Of course, whether he chooses to spend many more of them at the bank is an open question.

The recent quarterly results were excellent. Net income rose 32 percent to $7.2 billion, loans were up 6 percent and deposits 4 percent. Merrill Edge, the bank’s discount-brokerage subsidiary, saw assets jump 22 percent past the $200 billion mark.

Although our gain thus far of 307 percent is huge, our initial sell target on Bank of America is $38.74. That projects a further upside of 38 percent. If we are correct, and of course there is no guarantee, that will be sweet, especially if it occurs in the next few years.

Throw in further dividend hikes, and like whipped cream atop a thick chocolate shake, this could prove to be a savoury deal for investors seeking both capital appreciation and dividend growth.


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