Warren Buffett is dumping his Bank of America shares. Should you follow Him?

Berkshire Hathaway CEO Warren Buffett has long been a fan of bank stocks. In fact, the banking/insurance sector has probably been the sector in which he has invested the most throughout his career. In recent years, Bank of America (BAC -1.47%) was holding no. 1 of Berkshire among bank stocks, but that appears to be changing.

Buffett’s conglomerate has consistently sold Bank of America, and it’s not entirely clear why. So what should investors do?

Image source: Bank of America

Buffett and Bank of America

Buffett has long been a fan of Bank of America, singing CEO Brian Moynihan’s praises repeatedly, and has owned the stock since buying BofA’s preferred stock in 2011.

Bank no. 2 in the country by assets has long been Berkshire’s No. 2 Applebut Buffett has sold a significant portion of his holdings in recent months. In its most recent filing on Sept. 10, Berkshire Hathaway said it sold 5.8 million shares of Bank of America in just three sessions leading up to the day, generating about $230 million in proceeds.

Since mid-July, Berkshire has sold about $7.2 billion worth of BofA stock. Buffett has not commented on the sale, but there is much speculation about the move. CEO Brian Moynihan said he didn’t know why Buffett was selling the stock and couldn’t ask him.

Some have suggested that Berkshire is interested in reducing its stake below 10% so that it no longer has to report its activity in the stock. Buffett also told Berkshire shareholders earlier this year that he was selling Apple shares in part as a hedge against a higher capital gains tax rate, although Washington no longer appears to be considering such a move.

The Berkshire boss may also be interested in hoarding cash in anticipation of a possible recession. The conglomerate already has a record cash balance after divesting much of its Apple stake. Ultimately, Buffett and his team at Berkshire may no longer think Bank of America is as good an investment as it once was.

Should you follow Buffett’s lead and sell Bank of America? Let’s take a closer look.

Where is Bank of America today?

Bank of America posted mixed results in its latest earnings report. Revenue was basically flat in the quarter, up 1% to $25.4 billion, although net interest income fell 3% to $13.7 billion. Earnings per share fell from $0.88 to $0.83.

The company is seeing growth in loans, which rose modestly from the year-ago quarter to $1.05 billion, and average deposits rose 2 percent to $1.91 billion, showing its balance sheet is growing.

The Federal Reserve cut interest rates by 50 basis points on Wednesday, but the impact on Bank of America is expected to be mixed. Net interest income is likely to decline as credit spreads narrow. However, a stronger economy is good news for Bank of America and should encourage more credit card spending, more consumer and business lending, lower loan loss provisions and increased demand for refinancing and mortgage loans.

The company expects net interest income to improve from $13.9 billion in the second quarter to $14.5 billion, benefiting from revaluation of fixed-rate assets due to lower interest rates and the end of a bank yield index in which he paid. Fixed rate asset pricing shows there is some benefit to lower rates for BofA, even though the direct impact of lower rates is expected to be negative.

As a stock, Bank of America looks like a solid value, trading at a price-to-earnings ratio of 14 and offering a dividend yield of 2.6%.

Little has changed with the company since Buffett started selling, although the interest rate environment has evolved. In light of this, Bank of America investors may want to watch the business over the next few quarters to see how it fares in a lower interest rate environment.

In fact, the best reason to own BofA stock may be Buffett’s longtime endorsement of the business and CEO Brian Moynihan, who according to Buffett doesn’t do “bullshit.” Berkshire’s sales do not appear to be motivated by any problems with BofA’s business. The bank’s shares are safe to own and look like a solid bet for value and dividend investors.