Billionaire Warren Buffett Sells Bank of America: 3 Possible Reasons Why

Warren Buffett has indisputably one of the best investing track records of all time, so it's no surprise that many investors closely track every move the 93-year-old billionaire makes.

Buffett's stock moves are usually disclosed in his conglomerate Berkshire Hathaway 's (NYSE: BRK.A) (NYSE: BRK.B) 13-F filings , released 45 days after quarter-end. However, when Berkshire owns more than 10% of a company and trades in the stock, it has to file a disclosure right away. That happened last week, when Berkshire disclosed it sold about 34 million shares, or $1.48 billion, worth of Bank of America (NYSE: BAC) , Berkshire's second-largest common stock holding, between Wednesday and Friday.

To be sure, that marks a trim of only 3.4%, as Berkshire still holds 999 million shares. Still, this is the first sale of the stock by Buffett since 2019, when he trimmed the stake for regulatory reasons, before Berkshire received permission to own more than 10% of the stock.

However, Berkshire was later granted permission, and this is Buffett's first sale of the stock since then. Without having to deal with regulatory restrictions, why might Buffett be selling Bank of America stock now?

Berkshire's history with Bank of America

Berkshire bought its way into Bank of America in 2011, in the aftermath of the Global Financial Crisis of 2008 , when many investors were worried about the banking industry's liquidity. Berkshire invested via convertible preferred stock , which is like a bond, but can be converted to a common stock at a higher price in the future. In 2017, Buffett exercised the warrants that came with the preferred stock to buy common shares, and even added more common shares thereafter.

It was perhaps surprising that Buffett chose to trim some shares last week, especially given his preference for holding stocks for long periods of time. Moreover, Buffett maintained his Bank of America stock even when he sold virtually all his other financial stocks between 2020 and early 2023.

Yet, there are likely three good reasons the Oracle of Omaha chose this moment to trim his second-largest holding.

1. He could be raising cash for his successors

While Buffett seemed as sharp as ever at the latest Berkshire Hathaway meeting, he is turning 94 years old next month. At the May meeting, Buffett noted that he feels fine, but also that he clearly had succession on his mind: "We'll see how the next management plays the game out at Berkshire, [but] fortunately you don't have too long to wait on that. I feel fine, but I know a little about actuarial tables."

While Buffett has said that Berkshire's growing cash is the result of not being able to find good things to do with it, perhaps Buffett, being the generous man he is, wishes to leave his successors lots of flexibility when he exits. After all, if Berkshire's cash were tied up in investments Buffett made at the end of his life, it could limit what his successors may be able to do. They may also feel hesitant about unwinding a position Buffett had recently taken.

That could explain why Buffett has been raising lots of cash lately. In the first quarter, Buffett sold a fair amount of his largest stock holding, Apple (NASDAQ: AAPL) , trimming it by an even larger 13%, with Berkshire's cash pile soaring to a record-high $189 billion.

Making the case for cash even stronger, Berkshire can now earn a very high return on its cash by investing in short-term risk-free Treasuries. Three-month Treasury bills currently yield 5.333%, their highest yield in many years -- and certainly much higher than Bank of America's current 2.24% dividend yield .

2. Corporate taxes may go back up

Another reason Buffett may be raising cash came up at the May shareholder meeting. When discussing his recent sales of Apple, Buffett said taxes were a big consideration:

Almost everybody I know pays a lot more attention to not paying taxes than I think they should. We don't mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we're taking in Apple and that rate was 35% not too long ago, and it's been 52% in the past when I've been operating... It doesn't bother me in the least to write that check and I would really hope that with all that America has done for all of you, it shouldn't bother you that we do it and if I'm doing it at 21%, and we're doing it at a lot higher percentage later on, I don't think you'll actually mind that we sold a little Apple this year.

Here, Buffett is referring to the corporate tax rate that the government charges on a corporation's profits. That rate was lowered from 35% to 21% as part of the 2017 Tax Cuts and Jobs Act. Those tax cuts, however, are set to "sunset" next year and revert back to their old rates, unless Congress intervenes.

With the election outcome still uncertain, Buffett is perhaps preparing for Apple to pay a higher tax rate. If taxes would revert back to 35%, that would make Apple's not-so-cheap current valuation, at 35 times trailing earnings , go even higher to 42.5 under the old tax regime, given the same level of operating earnings.

Before anyone panics, however, it does not appear as though Democrats want to have the corporate tax rate revert to the old level. As part of its fiscal 2025 budget, the Biden Administration proposed splitting the difference, raising the corporate tax rate to 28%. Under that scenario, Apple's price-to-earnings (P/E) ratio would currently be 38.4.

Bank of America's P/E ratio is far lower than Apple's, closing in on 15 times earnings, but that is near the highs of the last seven years since Buffett's owned the stock. And after a strong run this year, Bank of America stock is closing in on all-time highs hit in early 2022, before interest rates spiked.

BAC data by YCharts.

3. Buffett may have soured on Bank of America and its giant unrealized losses

Finally, there's also a possibility Buffett has soured somewhat on Bank of America, or at least enough that he doesn't wish to have it as such a large part of his portfolio. After all, banks don't really have "moats" in the way that Apple or other big-time consumer brands do, such as longtime Buffett holdings Coca-Cola or American Express .

The big banks, Bank of America included, have somewhat of a competitive advantage as they can charge a lower deposit rate than others. This has mostly shielded BofA's earnings from the inverted yield curve we have experienced over the past couple of years. However, even Bank of America saw its net interest income fall in its recent quarter, as its deposit costs rose as customers moved money into high-yielding CDs or to other banks with juicier deposit rates. Moreover, as the price for being one of the "too big to fail" banks, Bank of America is subject to strict regulations, inhibiting growth.

Additionally, Buffett may believe Bank of America made a foolish decision with its cash holdings several years ago by investing them in long-duration, government-insured mortgage-backed securities when interest rates were very low.

As interest rates have spiked, Bank of America has seen the value of these low-yielding mortgages fall. As of March 31, Bank of America had $109 billion in unrealized losses on this held-to-maturity portfolio -- the largest in the banking industry.

While Bank of America won't actually take those losses if it doesn't sell the securities, that portfolio will take a long time to mature. As of March 31, the company's held-to-maturity portfolio was about $587 billion, down just 13% from its peak in late 2021, which was nearly three years ago. Meanwhile, BofA has missed the opportunity to deploy those funds into higher-yielding Treasuries, for instance.

Banks' loan holdings are difficult to analyze at the individual loan level, so bank investors have to put a lot of trust in a bank's management. Bank of America management's error here, while certainly not fatal, may have discouraged Buffett somewhat.

All three of these reasons likely played a role in Buffett trimming his Bank of America shares. Going forward, one shouldn't be surprised if Berkshire ends up selling more Bank of America stock in the weeks ahead.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein and/or his clients have positions in Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy .