Bank of America (BAC) stock has been one of the better bets among large-cap financials over the past few years – but as a long-term holding, it leaves everything to be desired.
True, shares in the nation’s second biggest bank by assets generated an annualized total return (price change plus dividends) of more than 20% over the past five years. That beats the broader market by about 4 percentage points.
And it’s not for nothing that BAC remains one of Warren Buffett’s favorite stocks. Berkshire Hathaway initiated a position in BAC in the third quarter of 2017. And while Buffett has exited stakes in a host of other financial names over the years, BAC is still Berkshire’s third-largest holding.
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Indeed, BAC accounts for more than 11% of the value of Berkshire’s U.S. equity portfolio. Meanwhile, with more than 8% of its shares outstanding, Berkshire is Bank of America’s second-largest investor after Vanguard.
It’s hard not to like a stock so beloved by Warren Buffett, especially when he’s gone out of his way to praise the bank’s management.
Wall Street likes BAC too. Of the 25 analysts covering the stock surveyed by S&P Global Market Intelligence, 14 rate it at Strong Buy, seven say Buy, three have it at Hold and one calls it a Sell. That works out to a consensus recommendation of Buy, with very high conviction.
“We believe that the current BAC share price undervalues the franchise given ongoing improvement in return metrics and continued positive operating leverage,” writes Argus Research analyst Stephen Biggar, who rates the financial stock at Buy.
But as bright as BAC’s prospects might be, shares have been a truly dreadful buy-and-hold bet.
Blame the Great Financial Crisis
Bank of America was formed when NationsBank acquired BankAmerica in the late 1990s to create the country’s first coast-to-coast bank. The firm followed up with other mega deals, such as scooping up FleetBoston Financial, MBNA and U.S. Trust.
Sadly, the bank’s hunger for deals was ultimately its undoing.
When the housing market imploded and the Great Financial Crisis hit, Bank of America went shopping. The firm’s acquisition (with government assistance) of Merrill Lynch worked out. Its purchase of Countrywide, then the nation’s largest mortgage lender, did not.
With a deal price of about $4 billion in stock, Countrywide looked like a fire-sale bargain. Instead, it saddled BAC with hundreds of billions of dollars in bad loans and tens of billions of dollars in legal settlements.
A stock that traded north of $50 in 2007 went for less than $5 in March 2009. More than four years later, BAC stock was still below $15. That made shares essentially immaterial among the price-weighted Dow Jones stocks. And so in the fall of 2013, BAC was replaced in the blue-chip barometer by Goldman Sachs (GS).
The bottom line on Bank of America stock
Bank of America has been a terrible buy-and-hold bet. Over its entire life as a publicly traded company, BAC has generated an annualized total return of just 4.3%. The S&P 500, by comparison, returned 10.8% over the same time frame.
Shares also lag the broader market over the past 10 and 15 years. True, the stock has been a winner over the past five years – and doubles the performance of the S&P 500 over the past 52 weeks.
But as for the past two decades? It’s sort of unforgivable.
Have a look at the above chart and you’ll see that if you invested $1,000 in BAC stock 20 years ago, today your stake would be worth about $1,900 – good for an annualized total return of 3.3%.
The same amount invested in the S&P 500 would theoretically be worth about $8,000 today, or an annualized total return of almost 11%.
Past performance is not a guarantee of future results. Let us pray we never see something like the GFC again. If nothing else, BAC’s 20-year return shows how the damage inflicted by the global crisis continues to haunt investors to this day.