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Summary

  • The metric that really matters for long-term BAC shareholders is the historic Price to Book Value multiple.
  • Yes, the $17B Department of Justice settlement is imminent.
  • Yes, the dividend is 400% higher.

The recently increased Bank of America (NYSE:BAC) dividend from $0.01 to $0.05 per quarter and the imminent $17B settlement with the Department of Justice has already been covered extensively in the media and by my fellow Seeking Alpha contributors. This article will have a longer-term focus looking at an often overlooked value metric; the historic Price to Book Value multiple.

BAC is one of the most polarizing stocks available for investment today. Bulls will point to the Bank's growing earnings, dividend growth, and an eventual multi-year share buyback as well as the recovering U.S. housing market. Bears will point to perceived weak management, continued legacy issues from the acquisition of Countywide, persistent low interest rates, increased banking regulation, and repeated billion dollar legal settlements.

If we as investors can block out the short and medium-term "noise", both bullish and bearish, a picture of long-term value emerges.

The ten year BAC Price to Book Value chart below illustrates that from 2004-2007, before the 2008 financial crisis, BAC stock regularly traded at more than 1.5 times Book Value.

BAC Price to Book Value Chart

BAC Price to Book Value data by YCharts

As we look at longer term BAC Price to Book valuation, the 20+ year BAC Price to Book Value chart below illustrates that BAC share valuation from 2004-2007 was no fluke. For almost two full decades BAC shares regularly traded at approximately 1.5 times Book Value, therefore this is its historic mean.

BAC Price to Book Value Chart

BAC Price to Book Value data by YCharts

Some investors will say, "It is different this time..." and believe BAC shares will never trade at 1.5 times Book Value again. They feel the shares cannot, or will not, revert to the mean.

It is never "different this time." In the long-term, assets always revert to the mean.

It was not "different" in the late 1920s.

It was not "different" in the late 1990s.

Even Warren Buffett reverted (or regressed) to the mean.

Source: Marketwatch.com

General Analysis:

In its most recent quarter BAC reported second-quarter earnings of 19 cents per share. Excluding legal costs of $4 billion the Bank earned 41 cents a share, exceeding analyst estimates of 29 cents per share. The BAC consumer real estate units revenue fell $725 million to $1.4 billion from a year previous. Trading desk revenue rose 5% to $2.4 billion. In total, overall bank revenue fell 4%.

The 29 analysts offering 12-month price forecasts for BAC have a median target of $18.00.

Source: Money.CNN.com

2014 Earnings per Share forecast: $0.82

2015 Earnings per Share forecast: $1.50

Source: Money.CNN.com

In conclusion, long-term Bank of America shares will revert to the mean and trade at approximately 1.5 times Book Value. With shares down $3.00 from their 52 week high and a forward price to earnings multiple of 10.1 times earnings, BAC shares currently present a strong value proposition for investors.

Source: The Only Metric That Really Matters For Long-Term Bank Of America Shareholders