Bank of America (NYSE:BAC) has held quite well over the last five weeks as the market has started to become more volatile. The bank finally delivered some good news to shareholders today as the Federal Reserve approved its request to increase its quarterly dividend from one cent a share to five cents a share. This was the bank's first dividend increase since before the financial crisis. The bank had to drop its request for a $4B addition to its stock repurchase program, but this will be revisited in the future.
In addition, a settlement with the government around the mortgages issued before the financial crisis seems imminent. Although the fine (somewhere between $14B to $17B) will be hefty, it will remove another huge overhang on the bank and the stock. In addition, less than half of the actual settlement will be actual cash and most will consist of mortgage modifications and the like.
The stock languished under both of these concerns for most of the first half of the year but has spent the last few months consolidating and now appears ready to break out to the upside (See Chart).
It feels like a floor on the stock has been established just under the current stock price and the risk/reward seems skewed to the upside. 2015 looks like it will be a brighter year for banks in general and for Bank of America in particular.
Earnings are projected to go from ~80 cents a share this year to a consensus $1.50 a share for FY2015. This is the fastest earnings growth projected for next year of all the major banks. In addition, consumer confidence is at the highest level since October 2007, monthly job growth has averaged over 200,000 in 2014 so far and mortgage rates remain near historical lows. This all bodes well for a slumping housing market to improve later this year and into 2015, which would be a positive for all banks.
In addition, after contracting in the first quarter of this year; Q2 GDP growth came in at 4%. An improving economy would be good for loan growth and also could boost interest rates, which would help the net interest margin at banks; a key driver of earnings.
Finally, the class warfare rhetoric that currently is in vogue in front of the mid-terms which has targeted banks at times, should lessen after the elections. There is also a good probability of the Senate switching parties which would provide a stronger check against the myriad new financial regulations that have been a hallmark of the past four years. If that event does indeed occur, the financial sector could be one of the strongest sectors in the market post-election.
The shares go for approximately ten times next year's consensus EPS, trade near book value and the company easily beat earnings expectations in its last completed quarter. Bank of America hit $18 a share earlier in the year. Given the positive factors lining up for the bank, I could easily see the stock hit that level again before 2014 ends. ACCUMULATE
Disclosure: The author is long BAC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.