Since Bank of America (BAC) passed the Fed's stress test recently, it has had its plan of buying back shares to the tune of $5 billion approved. While I believe that the company could have given both a dividend increase plan as well as an impressive share repurchase plan, the deal is done and shareholders of BAC must decide whether to keep holding the stock.
Last month I wrote this critical article in which I outlined my disappointment that BAC did not offer a plan to increase dividends:
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.
The article was met with very firm criticism as to my belief that BAC had "failed" its shareholders. While I might have been overzealous in defending my opinion, I also still believe that an entire segment of dividend seeking investors, who have held BAC shares hoping to be rewarded with dividends, have been disappointed.
My Opinion Is The Same But Has Softened To A Degree
While shares of many banks have dipped recently, the current share price for BAC of $11.97 reflects a drop of roughly 7% in less than 3 weeks. I have not seen a timetable for the share repurchase plan, but I would say that a savings of 7% at today's price could enable the company to either repurchase a larger number of shares right now, or also begin working on offering a more respectable dividend, to directly reward loyal shareholders.
The price to book value is now below .60 once again, and BAC could easily ramp up its repurchase plan beginning right now. It seems to me that some other respected analysts and writers have been suggesting that investors seek out the dividend payers in the banking sectors.
Please note this article, which was written more "tactfully" than my original piece. The author states rather quietly:
The financial sector has been a clear leader in the rally to all time highs in the U.S. stock market. Right now I'd be looking at bank stocks where management is demonstrating a commitment to taking care of shareholders with higher dividend payouts.
I believe that this will occur to the detriment of the BAC stock, and while a share repurchase under book value does make plenty of sense, I would argue that the dividend investor is more of a longer-term investor who would refrain from trading in and out of the stock, based solely on the immediate share price.
I contend that profit taking by investors who are only seeking capital appreciation will add to price volatility and the share price could wallow within a trading range, even though as more shares are repurchased, the share price itself should move higher.
That fact alone will have shareholders taking profits much more readily than the dividend seeking investors who will tend to hold the shares for much longer periods of time.
I have no crystal ball as to where the current share price is headed, but I believe that some sort of "floor" might have been set if BAC included dividends in its plan submission. For now, shareholders will have to rely on the management of BAC to implement the share repurchase plan in such a way as to give some upward traction to the share price.
The Buffet Rule
Many folks point to the Warren Buffett rule of never paying a dividend. While that has worked for him, and has allowed his own company to expand by using other companies' dividends for himself, BAC is not a Berkshire Hathaway (BRK.A).
The exponential growth that BRK-A has enjoyed has come at the expense of shareholders who did not receive a penny from Buffett in the form of dividends. As noted in this rather "fun" article to read, the author states his case:
In the most recent quarter, Berkshire Hathaway collected more than $1.34 billion from its 31 dividend paying holdings - enough to pay $812 per share. Yet none of that money made its way back to shareholders. Granted, Buffett's style is to try and turn that money into more money. But for me, I'd rather collect a steady stream of cash that I can do with what I please.
The author adds some further clout to his message:
Apparently I'm not the only one that feels with this way … Other investors seem to prefer dividend stocks over non-dividend payers as well. From 1972 through 2011, U.S.-based dividend stocks in the S&P 500 returned 7.1% annually, far exceeding the 1.5% return for non-dividend payers.
While an investment in BRK-A is not a bad one, I would like to know why a dividend seeking investor would ever want to hold the shares? While it is true that the share price has risen roughly 25% in the last year, it is simply keeping pace with the other market metrics, and when we take a look at this chart:
The share price has just recovered from the 2009 low point. Holders of this stock have received absolutely nothing to continue to hold the shares aside from the hope that Warren will drive the company back to where it was prior to the drop. While he did, investors did not collect a penny, while Buffett collected every cent.
I am not debating the issue as to whether that is right or wrong, but as a dividend seeking investor, I certainly would not own shares of BRK-A.
As of now, until BAC shows me that the management is willing to give me income to continue holding shares, I will stay away from the trading, and capital appreciation crowd, who are hoping that the company's strategy pays off.
Time will tell, and the decision is up to you to buy, sell or hold BAC.