Friday, January 18, 2008

7.1%? Are you kidding me!!?

Picture: Kruschev (famous table pounder at the UN)

Well, 2006 seemed like the year I pounded the table for emerging markets. If you'd listened to me - heck, if I'd taken my advice more seriously - my portfolio and yours would be turning into serious dough by now.

I have a feeling that this year I'll be pounding the table about the banks.

Less than two weeks ago, I wrote about an eight stock portfolio containing three banks - stocks that Warren Buffett had recently added to his position in. Since then, two of the three stocks have fallen in price and the dividend yield has correspondingly increased. These three stocks, recent prices and yields are:

Wells Fargo (Bank) - WFC -$26 - 4.8% dividend yield

US Bancorp (Bank) - USB - $30 - 5.6% dividend yield

Bank of America (Bank) - BAC - $36 - 7.1% dividend yield

I can get a 7.1% yield on a bank stock - the largest bank in America by market capitalization -that's just announced a buyout of a troubled financial institution. 7.1%? Are you kidding me!? I say these banks offer fantastic value at these prices.

Do you really think the banking team would have even considered this buyout if they thought there was any potential they'd have to cut the dividend? Because that's what a 7.1% dividend for a major business institution implies: that a dividend cut, a la Citigroup, is in the works.

Unlike Citigroup, however, Bank of America is still buying. Does that sound like a troubled institution to you? 7.1%? You must be kidding.

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By comparison, the ETF "SPY" (S&P500) was trading at $132, and a 2.1% yield.


The Confused Capitalist


Deborah said...

I do not trust this call of yours at all...

Lets see a few banks go under first...

Jay Walker said...


I was pretty sure that you'd be the first one to pour skepticism on this call.

Time will tell, obviously, yet I think that Warren Buffett isn't unaware of the troubles that faced the US banks.

Looking at the prices when he bought them, he added roughly $800 million to existing positions in USB and WFC, but only about 1/2 of that in Bank of America (BAC), which was a new position for him

Whether that means he's less confident in BAC at that price, or just thinks their shares weren't as good value, remains to be seen.

I know I've said it before, but Warren Buffett doesn't usually buy into distressed businesses (GEICO excepted)- only misunderstood/ misvalued ones.


doug said...

I totally agree with you. There is value in these stocks. The same can be said for MO in 2003 litigation trials and MRK in 2005 during their Vioxx debacle. Both paid huge dividends at the time and proved to be great investments.

5 years from now, people will forget what the word "subprime" means.

David said...

I agree too.I am a big believer in good quality high yield bank stocks.
Definitely some of these banks are a better investment now since the yields are so high.

Checkout my blog when you are free.I write about foreign ADR stocks.

Geoff Green said...

US Banks are always going to be around and purchasing them at wholesale prices is going to be profitable in the long run. Use market timing and trend analysis to purchase them at the right time though!