Seeking Alpha
What is your profession? ×
Profile| Send Message|
( followers)
Step back to news from one year ago and you will be reading about how the inverted yield curve made a challenging environment for the big banks to drive earnings. Of course it was just last summer when the yield curve became inverted. Today’s big news: as of just days ago the yield curve is no longer inverted. This is a trend that will create good future news headlines for banks such as Bank of America (NYSE:BAC), Wachovia (NASDAQ:WB) and Citigroup (NYSE:C).

In the 5 plus years since 9/11, Bank of America’s PE ratio has fluctuated between 9 and 13. Interestingly enough, every year since 9/11 the PE has hit a low of 9 or 10. Every year the PE has also hit a high of 12 or 13. The current forward PE for Bank of America is 9.5, putting it at the low end of that range. If Bank of America’s fundamental valuation trend continues into the 6th year in a row, and the PE hits 12 or 13 over the next year, then expect the price of Bank of America stock to run into the mid $60s. From the current price of $50.26, this would generate a 25% - 35% one year return on investment for the patient investor.

Of course, this enviable return for Bank of America stockholders is over and above returns from dividends. Bank of America currently carries a 4.5% dividend yield – the highest dividend rate among its peers. Since 9/11, Bank of America has steadily and consistently increased its dividend yield. In fact, the dividend has doubled in 5 years. If their consistent dividend increase performance repeats itself, big news will be coming in just a few months. Based on Friday’s stock price, the trend of annual dividend increases could push the dividend yield over 5% as early as this fall. This consistent dividend performance and the low forward PE create a substantial buffer to the downside risk. Should the stock drop, the anticipation of the dividend increase in a few months will likely provide the catalyst for recovery.

Interestingly enough, Bank of America never ends up on the list of growth stocks. Yet at the end of 2001, the year that Ken Lewis became the CEO of Bank of America, the company earned $2.09. Next year Bank of America is projected to earn $5.28. Assuming they continue to hit their numbers, this is a CEO that knows how to generate an annual compound growth rate for investors of over 15%. By convention, stocks are usually separated into either Value stocks, Growth stocks or Growth and Income. By all accounts, Bank of America deserves the right to be put into a new category of Value, Growth and Income stocks.

Now that Bank of America is one of, if not the, largest bank in the US, concerns are being raised about the ongoing growth potential of Bank of America. Fortunately, it is a big world out there, and no one has told Ken Lewis that he can’t have a big piece of it for his stockholders.

Disclosure: Author has a long position in BAC

BAC 1-yr chart