Dividend Analysis: Bank of America Corp. 15 comments
June 03, 2008
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Linked here is a PDF copy of my detailed analysis of Bank of America Corporation (BAC) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Bank of America Corporation is a financial holding company providing banking and non-banking financial services in the United States and internationally.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BAC is trading at a discount to only 1.) above (Avg. High Yield Price ). If I exclude the high and low valuation and average the remaining two valuations, BAC is trading at a significant premium (26.0%). A Star is deducted since BAC is trading at a premium in excess of 5%.
Dividend Analytical Data: In this section, I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BAC earned one Star in this section for 3.) above. BAC has grown dividends for at least 10 years. It has paid a dividend since 1903 and has increased them for the last 20 years. Last year's dividend payout was 73%, up form 46% in 2006. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BAC earned two Stars in this section. BAC's NPV MMA Diff. is a strong $27,956 and is current earning more than the 4.61% money market rate.
Other: BAC is a member of the S&P 500, an Aristocrat and an Achiever. BAC has strong business fundamentals, a good customer base, a diverse product line and large geographic presence. These factors should help it to withstand a major economic downturn. BAC should continue to benefit favorable interest-rates.
Conclusion: BAC lost a Star in the Fair Value section, earned and lost a Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 1 Stars. This rates BAC as a 1-Star Very Weak stock.
September is the month that BAC normally increases its dividend. The question is, what will they do? Increase, hold steady or drop? BAC has not earned its dividend for the past two quarters and has an above-peer dividend yield.
BAC is a proud company and I would be surprised to see a dividend cut based on their financials. Over the last four quarters, cash has been between $35 and $40 billion. Short-term borrowings have inched up from $380 billion (06/2007) to $410 billion (03/2008). Operating cash flow has been negative for three of the last the four quarters, but cumulatively it is positive.
If BAC raises its dividend in September, it would likely only be a token increase of 3% or less. More importantly, it will be a strong message about management's confidence in the future. I would likely add some shares just to lock in a 7+% dividend yield.
Like HD, BAC can hold its dividend flat until December 2009 and still show calendar year increases in 2008 and 2009. I see this as the most likely scenario. Management can take a wait-and-see approach without damaging its dividend status. In this case, I would put BAC on the shelf until its future becomes a little more clear.
Company Description: Bank of America Corporation is a financial holding company providing banking and non-banking financial services in the United States and internationally.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BAC is trading at a discount to only 1.) above (Avg. High Yield Price ). If I exclude the high and low valuation and average the remaining two valuations, BAC is trading at a significant premium (26.0%). A Star is deducted since BAC is trading at a premium in excess of 5%.
Dividend Analytical Data: In this section, I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BAC earned one Star in this section for 3.) above. BAC has grown dividends for at least 10 years. It has paid a dividend since 1903 and has increased them for the last 20 years. Last year's dividend payout was 73%, up form 46% in 2006. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BAC earned two Stars in this section. BAC's NPV MMA Diff. is a strong $27,956 and is current earning more than the 4.61% money market rate.
Other: BAC is a member of the S&P 500, an Aristocrat and an Achiever. BAC has strong business fundamentals, a good customer base, a diverse product line and large geographic presence. These factors should help it to withstand a major economic downturn. BAC should continue to benefit favorable interest-rates.
Conclusion: BAC lost a Star in the Fair Value section, earned and lost a Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 1 Stars. This rates BAC as a 1-Star Very Weak stock.
September is the month that BAC normally increases its dividend. The question is, what will they do? Increase, hold steady or drop? BAC has not earned its dividend for the past two quarters and has an above-peer dividend yield.
BAC is a proud company and I would be surprised to see a dividend cut based on their financials. Over the last four quarters, cash has been between $35 and $40 billion. Short-term borrowings have inched up from $380 billion (06/2007) to $410 billion (03/2008). Operating cash flow has been negative for three of the last the four quarters, but cumulatively it is positive.
If BAC raises its dividend in September, it would likely only be a token increase of 3% or less. More importantly, it will be a strong message about management's confidence in the future. I would likely add some shares just to lock in a 7+% dividend yield.
Like HD, BAC can hold its dividend flat until December 2009 and still show calendar year increases in 2008 and 2009. I see this as the most likely scenario. Management can take a wait-and-see approach without damaging its dividend status. In this case, I would put BAC on the shelf until its future becomes a little more clear.
Disclaimer:
Material presented here is for informational purposes only. The above
quantitative stock analysis, including the Star rating, is mechanically
calculated and is based on historical information. The analysis assumes
the stock will perform in the future as it has in the past. This is
generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of BAC (4.0% of my Income Portfolio).
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I am disturbed by your analysis. If you think BAC is worth $25/share why do you own it? You also say that you think the dividend is safe. So basically, if you’re right, you will have a safe and secure dividend at just under a 10% yield. Do you think the market would allow such a deal? And if so, would you still be confident in the yield?
Also, your analysis uses historic numbers to estimate a valuation with no consideration for the complex reorganizations taking place as we speak and those to come in the near future. A purely quantitative analysis of a company obviously operating in an abnormal micro and maco-economic environment is irrelevant at best and at worst arguably irresponsible.
Morningstar's DCF model values BAC at more than twice the value your model suggests. So if you really do own BAC, for your sake, I hope Morningstar knows something you don’t.
Similar conclusion in this article:
seekingalpha.com/artic...
Long term, BAC should work out just fine. Just add slowly to existing long position. Every dollar down, add 5% to position (i.e. from 10000 shares to 10500). From 35.60 to 33.60, position should be 110%. If BAC does hit 26.60 (?), new position would be 145% of original position - with average yield over 8.2%! Eventually, BAC is back over 40 again.
With all the bank bashing going on there is no way of knowing where the bottom is. The bank bashers' must have loved the LEH scare today. Last week it was IMB's turn to have materially false information disseminated by MarketWatch. One wonders, who's next?
CrossProfit (consensus)
But then I remembered that Graham doesn't use trailing 12 month earnings numbers, but a much longer time period. So then I was suspicious of the author's accuracy. I pulled out my copy of "The Intelligent Investor" & sure enough, a Graham number calculation must use trailing 36 month earnings numbers. This is crucial because Graham's intent is to minimize the effect of a couple of great quarters as well as a couple of rotten quarters.
If I use a BAC price of $34, a 12 qtr av. EPS of $3.74, a P/B of 1.1, I get a (P/E)*(P/B) Graham value of 10.0. This is far below Graham's limit of 22.5.
On the other hand, it is also true that Ken Lewis has recently suggested that BAC will likely have another 2 lousy quarters going forward. So the trailing 36 month average EPS should continue its decline until 2009.
You can read about the MarketWatch article here:
www.crossprofit.com/ar...
CrossProfit
1. There is no mention for long-term investor benefits if BAC completes its Countrywide deal. In a strict business sense, buying tremendous market share for dirt cheap is a pretty good bet to make. History will show if it was right or not.
2. Two other super quick and dirty Graham values are interesting: Average EPS over the last 7 years X 25 = $86.21. Trailing 12 months X 20 = $47.40. Current price ($33.31) is a 61% and 30% discount from those numbers, respectively. Pretty nice safety margin I'd say for a leading issue. Remember: the lower the price falls the less risk you have of paying too much.
I love those two valuations. They are a great way to identify stocks worth digging into. Example: if you do the 7 yr and the 12 months valuations on Coke you get $47.75 and $51.40, which at the current price ($56.40) represent an 18% and 10% premium, respectively. No bargain opportunity here! Move along before digging deeper into the financials!
What about the head and shoulders chart eminating into the knee and toe eliptical pattern forming on the thigh? Has anyone given that any thought?
What about a Disneyland crystal ball????
Do high earnings yields scare you too?
quicktake.morningstar....
Make sense?
On Jun 05 08:08 AM Norman Lepoff, M.D. wrote:
> Good article and comments. I am afraid to invest in BAC at this time.