The Oracle of Omaha appears to favor financial stocks, so we investigate what his largest holdings are and if they are still worth buying?
Technology is the largest sector in the Berkshire Hathaway (NYSE: BRK.B) portfolio. However, when we discount Apple, the largest sector becomes financials, which is over double the size of the next largest segment. Let's take a look at what the largest financial services holdings are, and if retail investors should consider adding these stocks to their portfolios.
Bank of America Corporation
Bank of America Corporation (NYSE: BAC) is the largest financial services stock in the Berkshire Hathaway portfolio and the second largest bank in the U.S. The company provides a suite of banking and financial products and services for its customers. Its share price is currently down 31% this year, which is greater than the overall decline in the market.
In the most recent quarter Bank of America's total revenue of $23.2 billion was up by $400 million from the previous year, reflecting a gain in interest revenue from the Fed's rate hikes. Net income of $7.1 billion was down $1 billion year-over-year, but this is a common trend among banks as provisions for non-performing loans are improving in preparation for a potential downturn.
Bank of America also appears to be in a relatively strong position as its non-performing loans, leases, and foreclosed properties only represent 0.48% of everything within those segments -- down from 0.59% a year ago.
American Express Company
American Express Company (NYSE: AXP) provides charge and credit card products, and travel-related services worldwide. The company experienced the lowest year-to-date (YTD) share price decline out of the three stocks in this article at 13%. This share price decline is lower than the S&P 500, indicating that it is more resilient than many of its peers. However, it disburses the lowest dividend yield at 1.44%, which may not be as attractive for investors seeking to hedge against inflation.
In Q1 2022, revenue grew 29% from the previous year, reaching $11.7 billion. This was driven by healthy card member spending as travel and entertainment expenditure grew 121%, with spending amongst Millennials and Gen Z growing 56%. Net income fell 6% year-over-year due to higher customer acquisition costs. This fall in earnings is significantly less than that of Bank of America. The company reaffirmed its guidance of full-year revenue growth between 18% and 20%.
American Express Company's reserves as a percentage of total loans were 3.3% in the most recent quarter, down from 4.6% the year prior. The falling ratio is bad for investors as a potential recession would make it preferable to have a larger percentage of reserves to protect against possible loan defaults. This is a valid concern as net loan write-offs increased year-over-year from 0.6% to 0.8%.
U.S. Bancorp
U.S. Bancorp (NYSE: USB) is a financial services holding company. Out of all three stocks mentioned in this article, it is the smallest holding in Berkshire's portfolio. The company's share price is currently down roughly 19% YTD, which created an impressive dividend yield of 4.05%. This is perfect for investors looking for a cash-generating stock to diversify their portfolios.
Unlike American Express, U.S. Bancorp did not record exceptional revenue growth in the most recent quarter. Revenue grew by only 2.3%, while net income fell by 32% year-over-year due to a significant increase in provisions for credit losses. This makes the fall in net income easier to digest as it shows the company is protecting its financial future from a potential shock in the system.
Are these financial stocks a buy right now?
Presently, numerous headwinds face the financial services industry that may hurt these companies' finances and balance sheets. As a result, caution is advised when investing in this sector, but Bank of America and U.S. Bancorp may be good places to start your research.
