I have been tough on Bank of America (BAC) ever since they passed the Federal Reserve's "stress test" last month. I wrote this article in which I felt that BAC had failed shareholders by not hiking dividends significantly, and opting for a larger share buy back program of about $5 billion.
While it was my belief that BAC could have done both, specifically a large dividend hike, most readers felt that the share repurchase plan was the best option because of the price to book value discount. I tend to agree, but it is also my strong opinion that in today's world of yield seeking investors, BAC would have maintained a stronger core of long term investors by paying them to hold onto shares through the ups and downs of both business cycles and earnings reports. Here is what I said:
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?
We are seeing some of the effects of that right now, as BAC has come in with a less than stellar earnings report.
Bank of America Corp. reported a lower-than-expected first-quarter profit and its revenue fell, sending the No. 2 U.S. bank's shares down 3 percent before the bell on Wednesday.
Net income quadrupled to $2.62 billion, or 20 cents per share, from $653 million, or 3 cents per share a year earlier as expenses dropped and the bank set aside less money to cover bad loans. But total adjusted revenue fell 8.4 percent to $23.85 billion. Analysts on average had expected BofA to earn 22 cents per share, according to Thomson Reuters I/B/E/S. BofA shares dropped 3.3 percent before the bell to $11.88.
With A Missed Earnings Report Share Prices Could Be Quite Volatile
I have seen this time and time again in trading stocks. Traders, and even short term investors, will head for the hills at the slightest bit of bad news. Even good news that gives a stock a "pop" does not mean it will garner longer term investors, as stocks with strong dividends seem to. Not only long term investors, but also investors who will add when the share price dips, to capture an even better yield.
As of 8:20 am this morning in pre-market trading, over 16 million shares of BAC has changed hands and the price is about $11.88/share. It does not seem to me that the shareholders of yesterday, will be the shareholders of today.
I have no idea where the price will wind up at the end of the day, but it is my belief that the volatility would have been much less if BAC had announced an aggressive dividend hike in addition to the share repurchase plan. After all the earnings report is actually NOT all that terrible.
BAC might have "missed" but it did quadruple earnings, and is well on its way towards Moynihan's goal of cutting costs and streamlining the business.
BofA, the last of the big four U.S. banks to report results, has pledged to cut $8 billion in expenses by mid-2015 and has said it could reduce expenses in its division that handles delinquent mortgages by $1 billion by the end of 2013. The bank showed signs of progress in these efforts in the quarter, with total expenses falling 5.2 percent to $18.15 billion.
It seems that right now, those efforts are being ignored by shareholders looking for the immediate capital appreciation or "pop' in the share price.
A Silver Lining However
As the share price drops, if the company can react quickly enough, it now can buy shares back for even less than when it announced the plan.
Down from about $12.75/share when BAC passed the stress test, to the price right now of $11.89/share, offers a discount of nearly 42% to book value.
Share repurchase plans are somewhat cumbersome and timing is everything. I certainly hope BAC can take advantage of an even greater discount NOW than even one month ago, and offer these jittery shareholders some value for just holding shares.
If not, perhaps taking another look at its dividend policy might be warranted?