Bank of America (NYSE:BAC) announced on August 6, 2014 it will pay a dividend of $0.05 on September 26, 2014. BAC earned $0.19 per share for the second quarter of 2014, after a net income of $2.3 billion. The company is plus $0.14 for the quarter to grow its business and its book value. Investors will support the increased dividend and the profits that push the book value up, and we expect an increase in volume over the next 2 weeks.
The Negative. In the third quarter, 2014 BAC will pay the $16 billion for liabilities from the Residential Mortgage-Backed Securities (RMBS), with $9 billion going to the Federal government, and the rest to be used for consumer programs. Litigation expenses totaled $4 billion, and the settlement with AIG on Residential Mortgage-backed Securities totaled $650 million. All totaled this is a lot of money to Main Street, but to the big banks on Wall Street, this is the cost of doing business in today's market. The company reported at the end of the second quarter, it had cash on hand near $152 million. The 16 billion will not affect operations, and over the last 7 years, the company has amassed about $30 million in Deferred Tax Assets (DTAS) to use in the near future.
The banks are close to finishing all the lawsuits the government can bring forward, and are looking forward to the day of closing the books on this recovery period. Over the last 6 years, several departments of the Administrative Branch of the U.S. government has found multiple reasons to charge every major bank and win billions of dollars. Very little of this money has found its way to the people, most has just gone into the U.S. Treasury for the government to spend. I report this in a way to comprehend the activity since the financial crisis in 2007-08 and what the new normal has become in the business world. The loser in all this has been the American people, as the multitude of lawsuits have given the offended little in return.
The Positive. The takeaway is the banks are much stronger now and have moved forward. Bank of American is positioned best among the 6 big banks to gain the most in the next two years. Investors of BAC will profit from the increase in the dividend stated above, the difference in the stock price to book value is $15.22 to $21.16, as the stock is trading at a discount of 72%. This makes BAC a very attractive buy, with an upside stock price appreciation. We anticipate the stock price to increase to $17 by the end of the year on the increase of dividend, the book value, and the steady hand of the Federal Reserve keeping interest rates low and preventing inflation. Interest rates will rise in the future; however, the rise is not expected to hurt BAC, but to allow the company and other financial institutions to create a more profitable spread in managing money while doing business.
More of the Positive. Digging through the financial report, deposits were up $54 billion, which is a 5% growth over Q2 2013, and a company high of $1.13 trillion in customer holdings. Global Wealth and Investments reported $4.6 new money and a total of $2.47 trillion. Customers are coming to Bank of America and growing their savings and investments.
Credit accounts are growing, with over 1.1 new cards issued and 49% less charge-offs compared to Q2 2013. BAC also funded $13.7 billion in new home loans to nearly 43,000 customers. BAC is effectively and efficiently growing current business and taking on new business.
To the Future. BAC will likely have the most to grow and increase returns to its investors. We anticipate the stock price to appreciate to near $17 by the end of the 2014, based on the positives listed above. We expect the number of lawsuits to decrease and the company to retain its profits, pushing the dividend and book value up in 2015.
We anticipate an increase in the dividend to $0.10 in 2015, and based on the markets, could grow higher. BAC has 10.5 billion shares outstanding, which will prevent BAC from getting close to the dividends of some of the other large banks.
BAC has a strong cash flow, and will retain a large amount of cash to meet the government regulations for Basel III and the supplementary requirements. BAC, like many of the other 5 big banks, is much stronger and can operate profitably with all the government regulation, much better than many foreign banks in the world market.
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.