No. of Recommendations: 15
But...they still only managed a double digit ROE four times within memory.
...
I think in this case ROTCE is a more meaningful number, unlike BRK they are no serial aquirer.
Their ROTCE for the last five years was 15.5%, 14.86%, 9.48%, 17.02% and 15.15%. Even in 2020
they managed to get 9.48%, not too shabby. Assuming they continue to get a similar ROTCE in
the future, what would you pay for such a business?
You're right, that's a better metric. I also look at like PTPP earnings and pretax income on total tangible assets.
Sure, the company must have something good going for it or Mr Buffett wouldn't be such a big fan.
But I just continue not to see enough of them to interest me.
Let's look at it another way.
For example, in the last six years (2017 - 2022 inclusive) BofA have retained a whopping $115.9 billion in capital, call it a quarter of a Berkshire.
That's calculated simply as net earnings minus dividends paid out. The years in question correspond roughly to the era since Berkshire bought shares at full market price.
Yet earnings before tax are as flat as a pancake over those years. That includes a brief understandable dip in 2020 which doesn't change the trend.
In fact it's a gradual downtrend in real terms, falling around -3.5%/year.
So...what has been their rate of return on that $116 bn of incremental capital deployed? Negative?
A bunch of that retained capital went to repurchases, so earnings per share have done better than pretax total earnings, but still, the whole is not a pretty sight.
As a business they are not nearly keeping up with GDP.
Better run firms do better on this metric, a flavour of ROIIC.
As a random example discussed here lately, DG has retained about $5.5bn total in that same stretch.
On-trend real pre-tax total earnings are up about $1.15bn/year, which is 21% of the total retained capital. Each year.
And again, even more on a per-share basis because of buybacks, with a comparable percentage drop in share count, -18% at DG versus -22% at BofA.
Consequently DG's real pre-tax EPS rose at about inflation + 12.8%/year on trend in this stretch instead of BofA at around inflation + 0.7%/year on trend.
Even if you add the average dividend yield to both figures which flatters the bank, it's still a double digit gap in the rate of value generation.
So why would someone bother with BofA?
Unless you got your first 700m shares at $7, and/or you need to deploy $45bn somewhere "good enough".
Plus, I know which balance sheet I understand and trust more.
As mentioned, there must be charms I'm missing, something I honestly believe. Mr Buffett is much smarter than I am.
But until I spot them, the business doesn't interest me as an investment.
Jim
