Bank Of America: What To Do With $16B? – Bank of America Corporation (NYSE:BAC)

Investors in search of long term capital appreciation should set their sights on Bank of America Corporation (NYSE:BAC). The bank has largely left behind the long trail of litigation woes and regulatory limitations that had gripped it following its acquisitions of Merrill Lynch and Countrywide. Looking forward, the bank will be able to use its earnings to strengthen the stock’s price.

Bank of America Corporation reported total earnings for common stock shareholders of more than$16 B for 2016, up from somewhat more than $14B for 2015.

Year Total Earnings for Common Stock (Billions)

2016 $16.224
2015 $14.353
2014 $4.476
2013 $9.190

Although the stock price has risen from$16.83 at the end of 2015 to a current value of around$23-$24 per share, investors have been stubbornly unwilling to pay more than the bank’ s reported book value per share- $24.36 as of 1Q2017 BAC1Q17; even as other large banks command stock prices well above book value:

Bank Price/Book

Bank of America 0.96
JPMorgan Chase (NYSE:JPM) 1.32
PNC (NYSE:PNC) 3.91
US Bancorp (NYSE:USB) 2.05
Wells Fargo (NYSE:WFC) 1.47

Some of this resistance likely has to do with uncertainty about what the bank will do with its profits and in particular how much will be returned to shareholders. Yet for willing investors there is still a clear opportunity to take advantage of Bank of America’ s low Price/Book ratio as the bank continues to normalize operations.

Bank of America like other large banks cannot choose freely how to use its earnings, because it is severely constrained by the so-called “Stress Tests” used each year by the Federal Reserve to gauge how the banks would hold up in an economic downturn. Because of its rocky history during and after the financial crisis of 2008, Bank of America has been more restricted than its peers in its ability to repurchase stock and increase its dividend. This year’ s test results will be released June 30th, but until then investors will need to do some guesswork to predict to what degree BAC will be allowed to pursue its own plans.

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Management has largely telegraphed their enthusiasm for continued stock repurchases and a more generous dividend. Since the bank was authorized to begin share repurchases in 2013 the share count has steadily declined.

Year

Year Share Repurchases (Billions)

Shares Outstanding (Billions)

2016 $4 10.053
2015 $2.4 10.380
2014 $1.8 10.517
2013 $2.8 10.592

In its annual report, BAC2016, BofA CEO Brian Moynihan wrote that “we need to continue to reduce the number of shares outstanding.” targeting an ambitious, albeit long-term, goal of lowering the share count to pre-crisis levels, less than 5 billion. If so, the stock’ s book value per share must continue to trend upward.

On the other hand, the current annual dividend of$0.30 per share results in an under-achieving 1.30% rate of return, as the bank continues to lag behind its peers:

Bank Rate of Return

Bank of America 1.30%
JPMorgan Chase 2.36%
PNC 1.82%
US Bancorp 2.18%
Wells Fargo 2.85%

Wary investors may still be waiting to “see the money” before committing to a higher share price, but should pay attention to the details of the upcoming authorization for capital returns.

The nation’s largest banks have reached the point of being “too big to make new acquisitions”, and there are many who continue to beat the drums for breaking them up. In this environment the new keyword will be “organic growth”. Share repurchases and/or dividend increases will be the vehicles of choice to disperse their annual earnings. But, Bank of America’s Price-to-Book valuation continues substantially lower than its peers, giving investors a limited window of opportunity to profit from the continued growth of its stock price resulting from the annual repurchases of its own stock. Based on current book value and the expected increase of dividends and stock repurchases after the “stress test” suggests a BAC stock target price of $27 within the next 6 months.

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Disclosure: I am/we are long BAC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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