It’s time for the quarterly Warren Buffett watch. Buffett recently released his third quarter holding for Berkshire Hathaway (BRK.A). The report covers Buffett’s transactions up until September 30th of this year. Investors everywhere patiently await the disclosing of Buffett’s latest portfolio moves. So, what did Warren Buffett buy?
Buffett has been in the mood for bank stocks.
He increased his holdings in Wells Fargo (WFC) and Buffett also added to his defensive plays Johnson & Johnson (JNJ) and Procter & Gamble (PG). The one that caught my attention was Buffett’s new investment in Bank of New York Mellon (BK).
The Bank of New York Mellon is the oldest bank in the United States of America. The company provides asset management, security services, Treasury services, and wealth management services to its clients. The bank currently manages nearly $25 trillion in assets. The company primarily deals with institutional investors, corporations and high net worth individuals. The bank also acts as the trustee and document custodian for MBS securitization trusts.
This is not your ordinary bank. The bank does not deal with consumer loans so it does not have the same level of exposure to the risky mortgages that other banks do. Bank of New York Mellon’s only exposure is through investments in mortgage-backed securities. The bank has written down billions of dollars in assets over the last two years and done an impressive job of reducing the risk on its balance sheet. The bank is expected to increase its dividend next year because of its improved capital structure.
Buffett bought $52 million worth of Bank of New York Mellon between $24.17 and $26.85 per share. This was the high and low for the stock during the 3rd quarter. Shares look reasonably priced trading at 12 times this year’s earnings and 11 times next year’s earnings. The company is forecasting earnings growth in the low double digits over the next few years. The company has over $108 billion in cash and $41 billion in debt.
Buffett’s bet on the bank is tied to a continued economic recovery since the bulk of the company’s revenue is derived from fee income. Increases and decreases in the stock market directly impact the inflows and outflows of capital from investors. Buffett’s Bank of New York Mellon buy is a sign of his faith in global economies.