Bank Stocks: Warren Buffett Dives Deeper And More Will Join Him

(Bloomberg Gadfly) -- Warren Buffett is about to become the top shareholder at Bank of America Corp. He may soon be joined by a lot of less-famous investors flocking to U.S. bank stocks.

Yield, a key consideration for most investors, will be the lure: It's on the rise at U.S. banks, after Fed stress-test results earlier this week gave them the all-clear for sizable payouts. Rising dividends could elevate many banks' yields into or even above the zip code of 10-year U.S. Treasury notes and the S&P 500, which yield roughly 2.3 and 2 percent, respectively, according to Bloomberg data.  

That could revive investor interest in the sector, and it may not end there: Morgan Stanley analysts expect bank dividends to rise by a median 11 percent in 2018, after a median increase of 12 percent in 2017. Even perennial dividend laggard Citigroup Inc. -- which this week doubled its planned dividend -- may keep narrowing the gap between itself and other major lenders.

Bank stocks have rallied by nearly 30 percent since President Donald Trump's election, on hopes of looser regulation and tax-code changes, along with rising interest rates. They arguably still have room to run. Banks are slashing expenses while also, in some cases, bulking up in new businesses to supercharge growth (such as Goldman Sachs Group Inc.'s efforts in consumer lending or JPMorgan Chase & Co.'s credit-card push), which could add further upside.

It's true bank stocks are already richly valued, with the KBW Bank Index currently trading at a price-to-book ratio of 1.3, its highest level since 2007. And although that's less than half the lofty levels reached earlier that decade, nobody's expecting an extreme rebound toward a ratio close to 3.0. 

Still, decent dividends, along with exposure to the potential for more upside if factors such as regulatory and tax changes come to pass, may be enough to convince the Sage of Omaha and other investors to stick around awhile.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

  1. Notably, the yield on financials has lagged other sectors in the S&P where industries such as telecommunications, utilities and real estate have led.

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