Just recently, Berkshire Hathaway shared its most up-to-date stock holdings with the SEC. This is the company run by Warren Buffett. And most recently, they have chosen to purchase more shares of one particular bank stock.
Many people already know that Berkshire Hathaway has a $19.1 billion position in Wells Fargo. That doesn’t come as a surprise to anyone. But what many people do not realize is that Buffett also has a position in U.S. Bancorp that he has been steadily adding to over the past year.
While the biggest position addition has taken place between the first and second quarter of 2013, it’s also interesting to recognize that Berkshire Hathaway is continuously adding small incremental additions to the position during every quarter. When you compare that to Berkshire’s Wells Fargo position, you’ll see that they added large chunks of stock during the first and second quarter, but have remained quiet with the position throughout the rest of the year.
There’s no question that Berkshire Hathaway and Warren Buffett have shown a greater affinity for Wells Fargo. The value of their shares held is about six times higher. But that doesn’t make their purchasing of U.S. Bancorp shares any less interesting.
It could be quite easy to say that about $70 million in share purchases is inconsequential to Berkshire; you have to look at the bigger picture. Buffett has only added to four of his positions (a total of 42 companies) during the second quarter. So adding to the U.S. Bancorp position should not be taken lightly and it should not be ignored.
Why do you think Buffett keeps buying stock in U.S. Bancorp? There’s no question that Buffett is a value investor. He comes from the Benjamin Graham value investing school of thinking. And when compared to its peers, U.S. Bancorp certainly isn’t cheap to own. The company currently has a 3.1 price to tangible book value, which happens to be among the highest in the banking industry. The price to tangible book value is a measurement of the premium stock investors are willing to pay in relation to the equity on the balance sheet of the bank. This figure is a lot higher than some of Berkshire Hathaway’s other positions. In fact, Wells Fargo has a 2.1 price-to-tangible book value. And Bank of America’s P/TBV is only 1.2. U.S. Bancorp has a solid dividend yield at 2.4%, but it’s certainly not the best in the banking industry either.
Since it’s difficult to have the ability to speak with Buffett directly – unless you have $1 million or more to donate to charity to have lunch with him – you’d have to speculate that Berkshire continues to purchase this stock because it is a fantastic business, not because the stock is cheap, which we have are ready determined is not the case. There’s no competition when it comes to generating returns on equity (15.8%) and return on assets (1.65%), and also operating with an excellent efficiency ratio of 52.4%. U.S. Bancorp is often one of the top banks in the industry when you compare it to the major metrics.
When investing, we often try to find the next best bargain or the stock that is completely under the radar. But Buffett is reminding us through his steady purchases of U.S. Bancorp stock that he continues to believe in the old adage that “It’s far better to buying a wonderful company at a fair price than a fair company at a wonderful price,” which we all need to keep in mind from now on.