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Executive summary:

  • A response to a solid article by Achilles Research.
  • Dividend investors can find far better choices than Bank Of America for long term income.
  • Negative sentiment and headwinds are keeping BAC well below book value.

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I have been wrong about BAC in the past, most notably when I suggested that the stock would be stuck in a trading range about $1-$2.00/share ago. Soon after, the stock price broke out and topped $17.00 per share, then backed off. That being said, it has been somewhat range bound, even after outstanding results from the last earnings report.

This article is in response to the aforementioned article as to the 5 reasons why I believe Bank Of America should NOT be part of your portfolio, especially dividend seeking investors but definitely NOT limited to dividend growth investors.

I believe the stock still has many risks to consider before buying shares for any portfolio.

Reason Number One: Dividends

It does not get any more obvious than the current dividend. At $.01/share per quarter, this bank, that has been announcing extraordinary profits since taxpayers bailed them out, continues to pay a "whopping" dividend yield of .20%. Of course the regulators called the shots on what the bank could pay, but regardless of that, I find just about zero reasons for any dividend seeking investor to hold shares of BAC for any period of time, other than for a possible pop in the share price perhaps, OR for day trading purposes.

While it is true that the regulators have recently made some noise about "allowing" BAC to increase dividends, the bank just "declared" another penny per share for the upcoming quarter. Perhaps it should have been whispered, not declared?

Reason Number Two: Price To Book Value

This can be used by BAC bulls of course. If the share price is below book value, then bulls will always claim that the share price is undervalued, or cheap. I suggest that the market itself has pegged the share price, and it has stayed well below book value for an extended period of time because the stock is not worth any more than it is.

Bank of America was not the only bank that had a mess during the fiscal crisis and banking bailouts, but of the largest banks, BAC still has a share price well below book value.

As you can see, both Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) have climbed back above book value, while BAC remains well below. If the market believed that BAC was so undervalued, I believe the share price would already reflect it.

Did I mention that JPM has a dividend yield of 2.65% and WFC is currently at 2.65% as well?

For the growth investors, one look at this chart will also show quite clearly that BAC has not done much better (if at all) than the other two banks, in terms of capital appreciation.

Reason Number Three: Cost Cutting Outpaces Growth

While it is true that in the current interest rate environment, banks can borrow money at virtually zero interest, and then can turn around and lend that money at 3, 4, even 5% or more, Bank of America has made most of its money on cost cutting, not lending.

Much of the profit came from reducing expenses by 6 percent. A key part of that strategy has been slashing staff and branches. Bank of America has cut about 40,000 jobs since 2011, when it had more than 288,000 full-time employees.

The bank has done a great job of laying folks off and playing "small ball" with increased fees and bank charges, but lending is where the big banks grow revenues, and earnings. Banks can cut just so much before they cut muscle, not fat.

Since BAC has been shying away from mortgage lending since the Countrywide mess, more cuts have been made to the division and it is no secret that just about all of the big banks have been stingy with residential mortgage lending.

The bigger banks make fewer and fewer residential mortgage loans, and they hold even less of them in their portfolios; government-owned Fannie Mae and Freddie Mac own or guarantee 90 percent of all new mortgages. And mega-banks have sold off hundreds of billions in mortgage servicing rights, so a dwindling number of people write their mortgage check out to a bank. Bank of America, the second-largest bank by assets in the United States, has quietly exited the mortgage business altogether on a number of fronts, with other big banks joining them.

OK, so perhaps BAC simply does not want to have a repeat of the foreclosure mess that occurred previously. To me, this will limit the upside potential of any big bank, especially BAC.

Reason Number Four: Existing Home Sales Have Dropped

Could there be some sort of connection between BAC not giving out as many mortgages, to a lower rate of existing home sales? I cannot be certain, because there are too many moving parts, but if BAC is cutting back on lending it is possible that it can also be tied to these recent comments:

NAR chief economist Lawrence Yun noted "we can't ignore the ongoing headwinds of tight credit, limited inventory, higher prices and higher mortgage interest rates."

Don't misunderstand, I am in no way, shape, or form, saying that just BAC is not giving out many mortgages. I believe it is an issue that ALL the big banks are facing, however, while BAC has not loosened up its lending requirements, WFC happens to be easing its requirements. Obviously in an effort to garner whatever business it can, knowing that growing revenues and bottom line profits is a better long term approach than simply cutting costs.

According to a report by Reuters, Wells Fargo is looking to re-enter the subprime mortgage market by lowering its standards of acceptable credit scores for borrowers. Wells Fargo is the largest U.S. mortgage lender, and a move back into subprime mortgages may signal a sizable shift in the mortgage lending environment.

Some would argue that BAC is taking a better approach. OK, that is fair, but sometimes companies will go too far and wind up losing overall business as well. Yet another reason that I believe the share price has wandered beneath book value longer than the other banks.

Reason Number Five: Consumers Still Dislike Bank Of America

Forget that taxpayers bailed the bank out big time. BAC still seems to have a bad reputation among its customers, especially those with existing mortgages that are in danger of foreclosure. I would urge you to read this article about an all too familiar theme when BAC customers attempted to have their mortgages refinanced by BAC under HAMP guidelines.

The Home Affordable Modification Program (HAMP) offered banks government incentives-cash bonuses-to lower the principal or interest on underwater mortgages......The HAMP partnership was structured so that the government's role was to provide cash incentives to banks, while participating banks would be required to accept and process the applications of those who were eager to modify their onerous mortgages.....In 2009...Balthazar ("Balty") Alatas in Vallejo, California, had been out of work for a year and had been negotiating a HAMP mortgage modification with Bank of America for nine months. He was beginning to suspect that the bank's elaborate application procedure was deliberately designed to give people just enough hope to keep paying their old mortgages for as long as humanly possible. He had already emptied his Individual Retirement Account...

The bottom line was that this customer never got a modification, lost his home, and was "jerked" around by the bank who might never have wanted to give a modification anyway, or so it seemed.

This story could be repeated thousands of times across the country of course, but if and when these banking customers get back on their feet, do you think BAC will be their first choice to work with again?

My Bottom Line

BAC is not going anywhere, and perhaps at some point the share price will be above book value, and the dividends might be raised. That being said, when there are so many other, better, options, I believe BAC should be avoided by everyone (especially dividend seeking investors) except day traders, and those who are hoping for some capital appreciation from the current levels.

The easy money has been made.

Disclaimer: The opinions of this author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.

Source: 5 Reasons Not To Have Bank Of America In Your Portfolio