Given that Buffett's favorite industry to invest in is banking, perhaps it comes as little surprise that he's been piling into Bank of America (NYSE:BAC) in recent weeks.
After obtaining permission in April from the Bank of Richmond to increase Berkshire's ownership stake in BofA past the usual 10% limit for investment companies, Buffett has taken advantage by building Berkshire's stake to nearly 12% of the bank's outstanding shares. In total, approximately $2.1 billion has been invested in BofA stock within the past couple of weeks.
Why Bank of America? The simple answer is that it's a money machine and has cleaned up its act. We're more than a decade past the trough of the financial crisis, and BofA has put mortgage settlements and the awful credit quality of its loan portfolio to bed. Today, it is well capitalized and has been returning boatloads of capital to shareholders during periods of strong economic expansion. Had COVID-19 not gotten in the way, Bank of America was set to return $37 billion in cash plus buybacks to its shareholders between July 2019 and June 2020.
The bank also deserves credit for reining in costs by focusing on digital banking and mobile apps. With more of the company's customers conducting their business online, fewer physical branches have been needed, which has helped to reduce noninterest expenses.
But what might intrigue Buffett the most is BofA's interest sensitivity. It's arguably the most interest-sensitive money-center bank on Wall Street, and rates have nowhere to go but up over the long run. When the does begin raising rates in (presumably) 2023, Bank of America should be the biggest beneficiary.