Warren Buffett has always been sweet on banks. His company, Berkshire Hathaway, currently has a stake in at least six banks. It’s one of the businesses that Warren Buffett says he understands well. And this is one of his prominent nuggets of wisdom that you should invest in businesses that you understand.
Buffett recently boosted his position in the Bank of America. The Wizard of Omaha already had a significant stake in the bank and had to ask permission from the Federal Reserve before investing more. Anyone entity having a 10% stake or more in a bank becomes a regulatory issue.
But after the Fed gave go ahead, Buffett invested US$813 million more in the bank. It added three percent more in his existing stake in the bank.
Warren Buffett has been very prudent during this recession. But now that he is making some moves, should you mimic it? If the answer is yes, which bank should you invest in?
The second-largest bank
Toronto-Dominion (TSX:TD)(NYSE:TD), the most U.S.-focused and once one of the fastest-growing banks in the Big Five, is currently trading at a 20% discount. Though it’s not as steep as Bank of America’s 31% discount, we can chalk it up to Canada’s banking sector’s inherent stability.
The sector showed amazing resilience in the previous recession, and if another one is on the way, this Dividend Aristocrat might weather it well.
Stability during recession and anchoring down portfolio isn’t the only reason why Buffett might’ve invested in Bank of America. The stock is currently very desirably valued, and as a fundamentally sound institution with long-term growth potential. Similarly, Toronto-Dominion is currently undervalued and is expected to grow at a decent enough pace once the pandemic is over.
Toronto-Dominion has a massive footprint in both Canada and the U.S. With over 2,300 retail locations, 6,000+ ATMs, and over 13 million active digital customers, TD is one of the largest banks in North America.
Stock and dividends
TD hasn’t been a very aggressive grower in the past three years, but if stretch backs a bit farther into the history, its over-the-decade returns have been decent enough. Even when its current valuation is just four-fifth of its former one, the 10-year compound average growth rate (CAGR) is about 9%. It also offers a comparatively better return on equity of 11.9%.
As an aristocrat, TD has a history of increasing its payouts for nine consecutive years. Currently, it’s offering a very juicy yield of 5.2%, and its five-year CAGR of payouts is 9.15%. It means that the bank will likely double your dividends in about a decade. Currently, the bank is trading at a price of $60 per share.
Canadian banks are usually a safe bet in a tricky market. If you have a dividend-centric portfolio, then locking in this amazing yield and bright dividend growth prospect is a good idea.
If you are sure that the valuation will go down even further if another crash comes, you may wait for the price to go down, and the yield to rise even more.
Speaking of Warren Buffett...
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Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).