Bank of America: Earn 6.5% While You Wait
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David Kostin of Goldman Sachs, in a recent article, lumped Bank of America (BAC) into a category labeled as big banks with non-interest income of "76% of total earnings"; lets go to BAC's Investor Fact Book 2007. Non-interest = 48% of total income or, 37% smaller than Mr. Kostin's claim. Non-interest has nine categories; three of possible current concern are: Mortgage Banking = 1.3%; Other = 2.1%; and Service Charges = 13.4%. Mortgages + Home Equity = 22.3% of assets.
BAC has recently completed a $12 bil. preferred sale [plus VISA IPO for appx. $546 mil.]. That, coupled with other measures should boost Tier 1 Capital from the current 6.8% to 8% [the regulatory minimum is 4%]. Assets as of 12/31/07, following FAS 157 of Nov.14, 2007 are at: Level 1 = 14.2%; Level 2 = 79.0%; Level 3 = 6.8%.
BAC is on the S&P "Dividend
Aristocrats" list and is part of Mergent's "Dividend Achievers Index" -
DAA.
BAC has always raised and never cut its dividend from 1991 thry
2005 [Value Line]. BAC CEO Ken Lewis has made supportive statements
regarding the dividend. "In terms of attracting capital, you don't
want to reduce the return on that capital. So it might be
counterintuitive to cut the one thing that might bring in new
investors," noted Wayne Abernathy [executive director, American Banking
Association] in reference to dividends.
Then there is Countrywide Financial acquired on the cheap. But within Countrywide is a Federally charted thrift called Countrywide Bank. The 10% deposit limit does not apply to Federal thrifts. Might BAC seek a regulatory "reward" for buying and cleaning-up Countrywide; such as being allowed to use Countrywide Bank to circumvent the 10% depost limit? BAC is currently at 9.88% of national deposits.
With a 6.5% yield I fail to see any serious problem from any but the most restricted time horizon. As CEO Lewis said, "arithmetic overcomes all your issues."
Disclosure: Long
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This article has 7 comments:
Eichler
A bank is "well capitalized" if Tier1 capital equals 6% and Tier 1 + Tier1 capital equals 10%; BAC is at 11.02% [10-K, 02/28/08].
Eichler
Tier1 + Tier2 Capital equal 10% to be "well capitalized;" and BAC is at 11.02% [10-K, 02/28/08].
The point still stands...between yield and call money BAC makes fro an interesting financial stock.
BAC wouldnt need to cut the dividend fo the price to trade sideways. They might just not raise it for several years.
Tiedeman
The Wind