Bank Of America: Dead Money At Best

| About: Bank of (BAC)

Bank of America (NYSE:BAC) has been successfully rebuilding its business from big bank to "small" bank basics. The bank makes money from its transaction fees, checking fees, and all service related fees including credit cards. I believe that at $4.00/share (I owned it at around $5/share and sold at around $11) it was a bargain.

As of right now, Bank of America will struggle to move from its current trading range, to higher levels. I believe an investment right now in BAC is dead money.

The Bank Pays Shareholders Far Too Little To Hold On To Shares

As far as I am concerned, $.04/share dividend for shareholders is a slap in the face to all of us who actually funded its bail out when times were precarious. To pay the same tax payers virtually nothing to hold on to shares is demeaning in my opinion.

Yes, I know all about the massive share buyback plans Bank of America has announced. Impressive to many believers that it is the right move, I will offer only this; it has not done anything to move the price to book value.

BAC Price / Book Value Chart
(Click to enlarge)

The stock is selling at a 31% discount to book right now and nobody is biting. The stock has become a trading stock, not an investment. Why? Well not only do they refuse to pay shareholders to hold the stock, but the bank itself has not been able to worm its way out from under all of the terrible history it has.

As a matter of fact, now it has gotten worse than ever.

Bank Of America Loses In Court

Bulls will brush this aside as much too small an issue, since the award is so tiny compared to the cash the bank has. The problem with that thought process is that these bulls (or investors who bought the shares at $14.00 or $15.00) do not understand the precedent that this court decision has now set.

Bank of America, one of the nation's largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.

Moreover, the jury also found a top manager at Bank of America's Countrywide Financial unit liable, pinning some - if not all - of the responsibility for the bad acts on an individual.

Countrywide, the troubled mortgage originator that Bank of America bought in 2008, has been a morass of problems. While the bank bought Countrywide for $4 billion in 2008, analysts say they believe it has so far already paid close to $50 billion in fines and settlements. In light of Wednesday's decision, that figure is likely to continue to rise. (Emphasis added by the author)

Investors can stick their collective heads in the sand if they so choose, but that is the strategy of hoping and dreaming I have discussed before. The fact of the matter is that this jury ruling will open the floodgates of more civil actions that Bank of America will have to defend, or pay off.

That folks, spells trouble for BAC shareholders as these verdicts will continue to eat away at the profits of the bank.

Bank of America has spent the better part of the year trying to convince investors that its devastating mortgage problems are an issue of the past, and to some extent the bank has been successful. Its stock increased 54 percent in the past year.

Still, the weight of Countrywide's mortgage exposure hangs heavy over the bank and, compared with JPMorgan, Bank of America trades at a deep discount to its book value - a sign that investors believe that toxic housing loans will bedevil the bank for years to come.

The shares rose by 54% in 12 months, and I believe that was the real money to be made, even if I sold too soon (I left about 4 bucks on the table by not selling at the top). Those who feel the need to discount my article on the subject, need only look at this chart.

BAC Chart
(Click to enlarge)

Since mid-July investors have either lost money, are under water now, or traded the stock to eke out some profits. Longer term investors, hoping that the share buy backs would move the needle, have been more than disappointed; there is simply no reason to hold the stock! No dividends, no capital appreciation in 6 months, and now the future is cloudy.

I would take any up day as a day to sell some shares if you own this stock, OR avoid it if you do not.

What Will Help Bank Of America?

To me, the answer is quite simple. Take some of the money that was supposed to be used to buy back shares and pay shareholders the same dividend yield as Wells Fargo (NYSE:WFC). The foundation for longer term shareholders will be laid, and hopefully there will be enough cash left over to pay the civil suits, as well as any Federal Government actions.

Otherwise, shares of BAC are and will be, dead money.

Disclosure: I am long WFC. 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.