Bank of America (BAC) recently announced that it will be reducing its debt by $40 billion. This is part of BofA's strategy to reduce risk and leverage as CEO Brian Moynihan tries to engineer a proper turnaround for the company.
Since BofA will be reducing its debt, the interest payments will fall as well. BofA expects that the interest savings will be around $230 million a quarter, which comes out to be $920 million a year. It will plan to reduce debt by buying back Trust Preferred Securities and various forms of subordinated debt.
This is a good move by BofA as it will help the company shore up capital as they handle the high level of toxic assets that continue to drag down earnings.
Currently, a consensus of analysts believe BofA will earn $1.01 next year. An additional $920 million a year to the bottom line would increase the EPS by around 8 cents per share. We got this by simply dividing the savings of $920 million by the total shares outstanding of 10.78 billion.
BofA plans to continue to lower its leverage, which will mean greater interest expense savings. BofA currently has very favorable multiples due to the market being pessimistic about the company's future. BofA has a forward P/E of 7.44 and trades at .38x book value. BofA's recent savings of $920 million, will significantly impact the bottom line and also provide a cushion as the company continues to eliminate toxic assets.
Disclosure: I am long BAC.
