I have been a supporter of just about every move that Bank of America (NYSE:BAC) has taken since the fiscal crisis back in 2009. To be direct, I believe that the bank has cleaned up its balance sheet, has made money by becoming the largest "small" bank around, and has moved away from the poor mortgage and lending practices of the past.
The Countrywide debacle is slowly being cleaned up, and BAC has agreed to pay enormous sums of money back to homeowners through various state and federal litigations. The bank has come a long way since I first recommended the stock back in November of 2011 and once again in this article in December of 2011 when the price dropped another 5%. I even took the shares from my risk basket, and placed them into the Team Alpha Retirement Portfolio as a core holding for growth, announced in this article back in February of 2012.
In every single instance I was correct. To be candid, it was not that hard to be correct when the Government bailed BAC out with tax payer money, deemed them "too big to fail", and made it incredibly easy for BAC (and other big banks) to make money without taking any risks! The Fed's zero interest policy (ZIRP), almost gave virtually "free" money to the banks, especially BAC, to grow its balance sheet, and restore the amount of cash in the banks' tills to pass every "stress test" that the Government employed, to measure the relative health of the banking system.
I happen to believe it was the correct course of action, in the face of even more dire circumstances if these actions were never taken. That being said, I also believe that the actions have become a joke in the past 6-9 months.
On December 14th, 2012, I sold my position at $10.61/share, announced in this article. I had more than doubled my money and felt it was time to take profits. While it is true that I might have missed another 15-20% (and maybe even more since the latest "stress test" results) I have changed my positive opinion about BAC to one of shareholder disappointment.
The Share Buy Backs
Last week the Fed approved the capital plans of the vast majority of the big banks, BAC included. As a result, BAC announced a very large share repurchase plan of roughly $5 billion, and the redemption of $5.5 billion in preferred stock, in the months and quarters ahead. I saw no timetable for completion of the plans. This far exceeded the analysts' estimates of a $1 billion plan, and Wall Street cheered the moves with a 4% pop in the share price, up to about $12.60/share.
Many investors are also cheering the move, as this will also mean that eventually the total share repurchase will keep the share price well under overall book value which stands today at only 63% of the share price.
With an accelerated share repurchase, the number of shares bought back, at current pricing, would be roughly 400 million shares. Bank of America currently has about 10.8 billion shares outstanding. A total of 10.4 billion shares will still be outstanding, and the price to book value could dip at a bit under 60%.
The shares would still be selling at roughly a 40% discount according to these metrics. That would place a fully valued price of about $18.00/share as the new foundation for analysts to view.
Does this mean that BAC stock should be purchased at these levels? Well I suppose it would be how an investor views the recent developments.
Show Me The Money
I will agree that the share repurchase plan makes sense for the company, because when it can purchase its own shares at a discount to book price, it becomes a true bargain for the company, and potentially many growth investors. I say potentially because even with the share repurchase, investors do not know what management will do with all of the cash they have available to grow shareholder value from here.
After the share re-purchases and the preferred stock redemption, BAC will have roughly $515 billion in cash. My question is; why has no dividend increase been given to the very shareholders (tax payers) who bailed this company out in the first place?
This has been the defining moment for BAC in my opinion, to reward shareholders by showing them the money by dramatically increasing the dividends, as WellsFargo (WFC) did, by 34% over last year. Among JPMorgan Chase (NYSE:JPM), Capital One (NYSE:COF) and others, the average announced dividend increase was roughly 20%.
Bank of America sits at a $.04/share dividend with a paltry .30% yield. The current payout ratio is only 15%.
As far as I am concerned, this shows pure arrogance on the part of the BAC management and BOD. To avoid rewarding shareholders who have not only helped pay to rescue it, but who have invested in the shares of the company in the hopes of being fully awarded, tells me that BAC wants to have complete and total control of its cash hoard, and to ignore a significant portion of shareholder needs; income.
The Bottom Line
Bank of America has come a long way since 2009 and the share price might increase further. As a potential shareholder of BAC stock once again, I have decided to steer clear of buying shares until the bank decides to offer my portfolio decent value in the form of a respectable dividend.
I am utterly disappointed in Bank of America, as many other dividend seeking investors should be.
Disclaimer: This article is solely the opinion of the author and is not a recommendation to either buy or sell any security. Please do your own research and due diligence prior to making any investment decision and do not rely on the opinions expressed in this article.