What Buffett Knows About Bank Investing That You Don't

Updated to reflect additional information on buybacks and analyst ratings.

NEW YORK (TheStreet) -- In February, Warren Buffett made waves when he explained why an IBM (IBM) share lull would benefit his $10.3 billion stock holding. After Wells Fargo (WFC) and Bank of America (BRK.A) passed Tuesday's Federal Reserve stress tests, Buffett's point may also apply to his biggest bank investments.

In his annual letter, the investment guru detailed his math on how to gain on stock swoons and share repurchases, using his investment in IBM as an example. After Wells Fargo boosted its dividend 83% and indicated accelerated buybacks on the heels of stress test results, Buffett's largest bank holding may have a similar thesis, with a relevance to other Berkshire Hathaway (BRK.A) investments in Bank of America, American Express (AXP) and U.S. Bancorp (USB).

Warren Buffett

On Tuesday, Wells Fargo raised its quarterly dividend to 22 cents a share and indicated added buybacks to a 2011 program. Buffett owns 7.28% of Wells Fargo shares, worth $12.8 billion.

Other large Buffett investments in American Express and U.S. Bancorp also benefitted from capital return programs approved by the Federal Reserve. In buying back stock, banks will lower total outstanding shares thus boosting the proportion of earnings attributable to remaining shares.

American Express said it would launch a buyback program of $5 billion in shares and up its quarterly dividend to 20 cents, meanwhile U.S. Bancorp said it would hike its dividend by 56% and target $3.3 billion in buybacks. Buffett holds 13% of American Express shares worth over $8 billion, while he holds $2.14 billion in U.S. Bancorp shares, or 3.6% of the float.

Of the stress test results, Goldman Sachs analysts pointed to Wells Fargo, U.S. Bancorp and American Express as winners. "Based on today's results, we continue to believe WFC, JPM, and AXP are best positioned, while USB surprised the most to the upside," wrote Richard Ramsden. "Overall, the results came in mixed, with the strongest banks--AXP, JPM, USB, and WFC--announcing capital deployment above expectations," noted KBW analyst Fred Cannon about capital return programs.

That's where following Buffett's investment advice becomes key. In February, Buffett explained how shareholders can benefit from the underperformance of companies with buyback programs. That may look like a contrarian strategy, especially if it were applied to the red-hot bank sector until the investment strategy is explained.

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