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 (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.
Shane Vigna, Author at MyWallSt Blog