Warren Buffett is often considered a buy-and-hold investor, but that’s not how he treats every investment. Should you follow his bank strategy?
Warren Buffett, the CEO of Berkshire Hathaway (BRK.A) (BRK.B -0.16%), has a reputation as a buy-and-hold investor thanks to long-term holdings like Coca-Cola (NYSE: KO) and American Express (NYSE: AXP). But he doesn’t treat every investment like that. Some are opportunistic situations that he capitalizes on relatively quickly when he’s got a profit. That’s how Bank of America (NYSE: BAC) has turned out. Should you follow Buffett’s lead and look at bank stocks like New York Community Bancorp (NYCB 0.56%) and Toronto-Dominion Bank (TD -0.63%)?
Buffett’s Bank of America trade
When the Great Recession hit, Bank of America attempted to capitalize on the situation by acquiring Countrywide Financial. That didn’t work out well, as the mortgage sector wound up being a cesspool of poor lending decisions. Bank of America found itself in trouble to the point where it had to cut its dividend to a mere token penny per share per quarter. That’s an admission that the situation was pretty dire.
Ultimately, Bank of America needed help shoring up its balance sheet. Buffett came to the rescue, investing in the bank in 2011. That move gave the bank a financial cushion and, effectively, signaled to Wall Street that Buffett was confident in the company’s turnaround effort. Since that investment, Bank of America’s business and its stock have rebounded dramatically.
Buffett is now trimming Berkshire’s position on what was an opportunistic trade in a bank stuck in a turnaround situation. He may not see the same distressed opportunity he once saw in Bank of America, but there are some opportunities today for you to mimic that bank turnaround playbook on your own.
New York Community Bancorp: A $1 billion helping hand
Like Bank of America, New York Community Bancorp stepped into a banking crisis (the bank runs of early 2023) and bought up parts of Signature Bank, a troubled peer. That came shortly after the bank purchased Flagstar Bank. Basically, it materially increased its size in a very short period of time. It wasn’t prepared for the growth and, notably, the increased regulatory scrutiny that larger banks face. Adding to the problems, it was forced to admit that some large loans it had made were in trouble.
New York Community Bancorp cut its dividend to a penny per share per quarter. It turned over its leadership team, and it accepted a $1 billion investment from institutional investors to help shore up its balance sheet. There are many similarities to Bank of America here, which might interest investors. But it’s only appropriate for more aggressive types, since New York Community Bancorp lacks the size, diversification, and reputation of Bank of America. That said, given the cash infusion, it seems likely that New York Community Bancorp will be able to, eventually, effect a turnaround.
Toronto-Dominion Bank: In hot water with regulators
Toronto-Dominion Bank’s problems stem from weak internal controls around money laundering. That forced it to cancel an acquisition, which will likely put the Canadian banking giant’s U.S. growth plans on pause for a while. Although management is confident it will resolve the issues by the end of 2024, it will take time for TD Bank to regain regulator and investor trust. However, it has not cut its dividend and seems unlikely to.
The stock price weakness associated with the internal control problems has pushed TD Bank’s yield up toward the high end of its historical range. While growth may be slow for a few years, it seems likely that TD Bank will not only muddle through this period successfully, but that the generally well-run and respected bank will thrive over the long term. This is a pretty low-risk turnaround, since it maintains a strong position in its home market of Canada. You’ll be able to collect a generous 4.7% dividend yield while you wait for growth to resume.
Bank of Nova Scotia and KeyCorp: Helping each other out
Bank of Nova Scotia (BNS -0.94%) and KeyCorp (KEY -0.18%) are joined now that Bank of Nova Scotia has agreed to buy roughly 15% of KeyCorp. The problems they face, however, are materially different. Scotiabank, as Bank of Nova Scotia is usually known, took a unique approach to growth, skipping over the U.S. market and instead focusing on expanding in Latin America. That didn’t work out as well as hoped, and now it’s shifting gears as it looks to catch up to its Canadian banking peers.
This will be a multi-year effort, but it’s highly likely that Scotiabank’s performance will improve over time as it increases its exposure to the U.S. market. That’s where the KeyCorp investment comes in. It’s a move that could have only been made from a position of financial strength.
For KeyCorp, the investment amounts to a cash infusion that will help shore up its balance sheet, giving it more leeway to improve its lagging business. The difference is that KeyCorp’s troubles are with its main operations, while Scotiabank’s headwinds are based on larger, strategic positioning changes that need to be made. However, the tie-up will help both meet their long-term goals.
Neither bank is in dire straits, but both will benefit from an improved operational focus. Meanwhile, you can collect a generous dividend yield of nearly 5% from KeyCorp and an even more attractive 5.7% from Scotiabank while you wait for improved performance.
Risk versus reward, Buffett-style
Buffett’s aggressive and timely investment in Bank of America was driven by its strong franchise. Not all banks have large, diversified, and well-respected businesses like that. That’s why New York Community Bancorp and KeyCorp are probably the riskier options above. Still, both have received important cash infusions that should allow them to overcome their current headwinds.
TD Bank and Scotiabank have many of the same strengths as Bank of America, but neither one’s problems resulted in a dividend cut. Therefore, they could be relatively low-risk ways to invest in dividend stocks while still following Buffett’s bank turnaround playbook.
American Express is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Bank Of Nova Scotia and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
