I have been vilified by shareholders of Bank of America (NYSE:BAC) in my ongoing bearish opinion of the stock. I suppose the main question that I have repeatedly asked of the bulls is why does this stock remain well below book value?
Even though I might have been temporarily wrong as to the direction of the share price, there has never been a sound answer from Wall Street. There has also never been a solid answer from the bulls, but recent events might shine a glaring light, finally, on why this stock has, and will continue to sell at a steep discount to book value.
The breaking news of the bank needing to adjust its estimated capital ratio is not merely a simple task of resubmitting an adjusted version to the Federal Reserve Board as bulls might like to spin this. The dividend hike from $.01/share to $.05/share has been suspended, as well as the $4 billion stock repurchase plan the bank announced.
At the FRBs request, the company is suspending its previously announced 2014 capital actions, including the $4.0 billion common stock repurchase authorization and the planned increase in the quarterly common stock dividend from $0.01 per common share to $0.05 per share. Subject to completion of the third-party review and approval from the Bank of America Board of Directors, the company will expeditiously resubmit its data templates and requested capital actions in the 2014 CCAR plan for FRB approval. The company expects the requested capital actions to be contained in the revised CCAR submission will be less than the company's previously announced 2014 capital actions.
The implications of this will have a rather far reaching effect on all sorts of shareholders. While we do not know what the new numbers will be, they will not be positive, and that could mean more than a suspension of the dividend hikes and share buybacks. It might mean a complete end to both of these steps.
- Dividend shareholders will be impacted unfavorably as they will still get virtually nothing to hold the shares, so why would they continue to hold?
- Growth investors seeking faster capital appreciation will be affected by the suspension of the reduction in shares outstanding. This will mean that traders will seek greener pastures, placing further downward pressure on the share price.
These issues alone are enough to send shareholders heading for the hills for now.
Let's Not Forget the Department Of Justice Issues
As I have often mentioned, the end of litigation for past mortgage problems is far from being settled. As of now, it appears that it will likely be well more that the $13 billion that JPMorgan Chase (NYSE:JPM) agreed to.
Bank of America Corporation's legal woes continue with new settlement talks brewing between the bank and the U.S. Department of Justice (DoJ). The tentative settlement could cost BofA more than $13 billion. The news was first reported by Bloomberg.
It has been alleged that BofA, in an attempt to maximize profits, compromised on the quality of mortgage-backed loans sold in the pre-crisis period. The major portion of the faulty loans stems from BofA's acquisitions of Countrywide Financial Corp. and Merrill Lynch & Co. in 2008. These loans defaulted, thereby resulting in huge losses for investors.
The aforementioned settlement talks are still in a nascent stage and the actual amount is yet to be decided. As per the Bloomberg report, sources, on grounds on anonymity, further added that the final settlement would shape in the next two months.
The issue has not been resolved and this overhang will also place a lid on the share price of the stock, perhaps even well after it is settled.
Other Legal Issues Could Be Even More Explosive
As my fellow author, Josh Arnold, wrote in his well written piece of just 5 days ago, BAC has been named as a defendant in a lawsuit brought by the city of Providence Rhode Island. As Josh correctly pointed out:
If a payout is made in this case, it will set a very dangerous precedent going forward for big bank investors, leading me to consider selling my position in BAC.
Josh considers this lawsuit to be frivolous and he might be correct, but that being said, his crystal ball is as good as mine, and the worst-case scenario could set off a domino effect against BAC in hundreds if not thousands of similar lawsuits across the nation.
Bank of America Corp. and the New York Stock Exchange were among dozens of exchanges, brokerages and traders sued over high-frequency trading by the city of Providence, Rhode Island, over claims they rigged securities markets to divert billions of dollars from buyers and sellers of shares.....The Federal Bureau of Investigation has said it's looking into whether firms that engage in high-speed trades get an improper jump on other investors by using information about their trading to make profits....."Public investors are entitled to be treated fairly and honestly by brokers and exchanges," Providence said in its complaint. "In addition to destroying trust in the U.S. capital markets, the misconduct alleged herein has siphoned off billions of dollars from private and public pension funds and individual retirement accounts that millions of Americans depend on."
Is anyone still wondering why BAC is selling for well below book value now?
The Bottom Line
The recent pullback in the share price of BAC has just begun in my opinion. I suggest staying away if you have not invested in the stock, do not add to any positions, and wait for the dust to settle before buying.
If you decide to sell your position, it is my opinion that shares of BAC will see new 52-week lows based on the issues presented here, and will THEN be a potential for a risk investment.
Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.