American bank stocks are in a very interesting situation these days. Many US financial institutions are cash rich; yet share prices are low, indicating there is little or no demand for these classic value investments.
Not even Warren Buffett’s faith in institutions like Wells Fargo (NYSE: WFC) seems to be able convince the market that US banks are a good investments. Naturally, many value investors will wonder if there is a good opportunity to buy American bank stocks as long term value investment.
The most recent financial numbers for American banks; those from June 30, 2016, verify the contention that these stocks are a great value opportunity right now. Interestingly enough the best opportunities in American banking appear to be some of the largest US financial institutions, some of which are Buffett Favorite.
Is this the Best Value in American Banking?
Shares of Bank of America (NYSE: BAC); one of the largest financial institutions in the United States, were trading at $15.24 (€13.46) apiece on August 19, 2016. Despite that Bank of America reported revenues of $80.09 billion (€70.72 billion), a net income of $14.57 billion (€12.87 billion), a free cash flow of $15.29 billion (€13.50 billion), cash and short-term investments of $178.76 billion (€157.85 billion), $6.208 billion (€5.48 billion) in cash from financing, and $56.95 billion (€50.29 billion) in cash from operations on June 30, 2016.
Those numbers show us why Warren Buffett has gone out of his way to buy Bank of America stock. Berkshire Hathaway (NYSE: BRK.A) spent $5 (€4.42 billion) billion buy an option to purchase 700 million shares of Bank of America in 2011. The company also owns around $5 billion (€4.42 billion) worth of Bank of America’s preferred stock.
Despite its low price, Bank of America; which is sometimes called BOA by Americans, is a very good income stock – it delivered a dividend yield of 1.31% and a return on equity of 6.19% on August 19, 2016. More importantly, BOA is a company with assets of $2.187 trillion (€1.93 trillion); and an enterprise of value of $263.83 billion (€232.97 billion), that you could buy for $15.24 (€13.46) a share on August 19, 2016. If that is not a value investment I don’t know what is.
Another Great American Bank
Many people will be leery of Bank of America because of its involvement in the US financial crisis of 2008. BOA was one of the institutions caught up in the subprime mortgage insanity and the resulting scandals.
Fortunately there are some other great American financial institutions that avoided that mess. One of them is US Bancorp (NYSE: USB) a smaller bank based in the Midwest that is popularly known as US Bank.
US Bancorp is of interest to value investors because it reported a net income of $5.873 billion (€5.19 billion) on revenues of $20.63 billion (€18.22 billion_ on June 30, 2016. US Bank also reported a free cash flow of $1.423 billion (€1.26 billion), cash and short-term investments of $14.04 billion (€12.40 billion), $11.16 billion (€9.85 billion) in cash from financing and $8.069 billion (€7.13 billion) in cash from operations on the same day.
More importantly US Bancorp was a company with assets of $438.46 billion (€438.46 billion) and an enterprise value of $122.09 billion (€107.81 billion) that was trading for $43.30 (€38.24) a share on August 19, 2016. It was also generating some income for investors in the form of a 2.36% dividend yield and a 14.4% return on equity on the same day.
A final attraction to US Bancorp is that it is not heavily exposed to the American mortgage market. Its specialties are consumer accounts and commercial lending.
Warren Buffett’s Favorite Bank
Another fascinating opportunity in American banking is Warren Buffett’s favorite bank; Wells Fargo & Company (NYSE: WFC). Berkshire Hathaway (NYSE: BRK.B) owned 504.3 million shares of the historic bank as of March 31, 2016, MarketWatch reported.
Buffett is attracted to Wells Fargo because of its size and the cash it generates. On June 30, 2016, the bank reported a net income of $22.39 billion (€19.77 billion) on revenues of $87.82 billion (€77.55 billion). It also reported cash and short-term investments of $20.41 billion (€18.02 billion) and making $137.5 billion (€121.42 billion) in cash from financing and $11.84 billion (€10.46 billion) in cash from operations.
Although there are a few problems at Wells Fargo, it reported a free cash flow of -$7.366 billion (-€6.50 billion) on June 30, 2016. Despite that the sheer volume of cash generated by this bank makes it a value investment. It is also a company with assets of $1.889 trillion (€1.67 trillion) and an enterprise value of $614.38 billion (€542.52 billion) that was trading for $48.65 (€40.31) a share on August 19, 2016.
Buffett and his fellow shareholders also received a dividend yield of 3.11% and a return on equity of 13.02%. That makes Wells Fargo, an excellent income generator.
American Banks are a Value Investment
The financial numbers prove that American banks can be a value investment if you pick them carefully. Some US financial institutions are cash rich and fairly stable. That makes those banks an excellent means of protecting a portfolio from the growing financial turmoil in Europe and China.
Everybody who is looking for a safe investment for these uncertain times needs to take a look at the large American banks. They are cash rich and generating steady dividends in a very volatile age.