As dividend growth investors, there are times we overlook opportunities that can add important growth to our portfolio value. We become so focused on dividends that some opportunities that stare us right in the face simply are not on our radar.
That is not a bad thing for those of us who are retired or preparing to, but growth stocks should be something that we think about for a percentage of our portfolio. A case in point is Bank of America (NYSE:BAC), our focus stock for today's article.
The Basics And The Strategies
First of all as we already know, Bank of America is part of our core holdings within the "Team Alpha" portfolio.
Our portfolio now consists of; Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America (BAC), American Capital Agency (NASDAQ:AGNC), Intel and Wal-Mart (NYSE:WMT).
We just added Cisco (NASDAQ:CSCO) (review this article) to strengthen our technology stock holdings. It also will give us more income. Bank of America is a different animal. This stock will give us growth. Growth that can be used to extend the life of our portfolio and offer us an opportunity to gain wealth.
The reason is very simple. The stock is selling for about 1/3 of its book value.
Say whatever you want about the bank itself. Tell me how much you hate them for taking money from the government and the drain it became on taxpayers. The bottom line is that at the current share price of about $8.20/share, we could be looking at the biggest bargain in the financial sector, EVER. Want to get "even" with the big bad bank? Buy their shares when they are cheap. Bank of America shares are cheap.
The bank has redefined itself by continually working on cleaning up its balance sheet, removing toxic assets, eliminating underperforming divisions, reducing overhead by eliminating branches that have too little ROI, and by focusing the enormous assets of a BIG bank to the business model of a SMALL bank.
This chart tells the entire story as far as where the bank has been, and where it is now, in terms of its share price, book value and revenue growth.
Does this look like a chart of a company that is NOT on the right track? Revenue growth shot up, book value shot up, and the share price is low, compared to the book value.
This is a growth stock folks, and one that can add wealth to any portfolio, including for us retired folks.
The bank is not stopping here. After selling off the non-USA wealth management division just last week, BAC has decided to get rid of another division that underperformed and caused problems.
As noted in this article, BAC has ended its credit protection services division.
"Bank of America Corp will stop selling credit protection services which were the subject of a class action suit in which customers alleged they were charged without their permission and enrolled through deceptive practices."
At the same time they settled the $20 million class action, which now basically eliminates any further actions. To me this is another great move to get rid of the "big bank" persona, with all of the problems, settle these civil actions pertaining to this service, and move ahead with their overall strategy.
"Bank of America made an 'independent business decision' to end the services, according to court documents outlining the settlement in federal court. The move was part of a broader strategy to streamline the company's businesses, bank spokeswoman Betty Riess said."
Another area of interest has been the bank's lending practices. As noted in this article, banks have been lending less and buying more Treasuries.
"The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010."
OK, so banks are propping up our bond markets by using the cash it would "normally" use to lend, to buy more bonds. On the surface, that would seem like a good thing right? Not so fast. By keeping yields low, the banks are undermining their own lending because the risk of lending far exceeds the rewards.
"Banks may be forced into more risky assets and lending practices if yields continue to hover about record low levels, said David Hendler, an analyst at financial research firm CreditSights Inc. in New York. Their net interest margin, a measure of lending profitability, has declined to 3.52 percent, the lowest since 2009, according to FDIC data.
"'It doesn't pay to be aggressive right now if you are a bank, but continuing to buy bonds near these levels is not sustainable in the long run,' Hendler said in an Aug. 14 telephone interview."
I agree with Hendler completely, but I have a different idea. I think that banks like BAC will simply reduce their Treasury purchases. I can see them redeploying those funds into "local" lending, as the interest rates finally begin to drift up as money flows out of those bonds.
Local lending is much like what the small regional banks do now. They lend to small businesses, give mortgages out in local areas on a smaller scale, and stay away from most of the mega loans with high risk ratios. Basically they seek to reduce their risks while they lend intelligently for the returns.
Once the yields on the Treasuries are at a level that can offer banks another avenue of secure profits, then the bond buying can once again be ramped up. If the Fed gets in the way, then the banks could just continue playing "small ball" until the landscape changes.
There are others who still believe that bonds are the place for banks to be.
"Investors are more willing to accept low yields 'when you have large demand from the Fed as well as natural demand from banks,' said Matthew Duch, a fixed-income money manager at Calvert Investments, which oversees more than $12 billion in assets. 'Are bonds where banks want to be right now? No, but given the uncertainty over regulation, the economy and still weak loan demand in the market it's the best of lots of bad options,' he said."
OK, for now, it's fine. What this all means for Bank of America is that when we combine their basic fundamentals with a strategy of cleaning up their balance sheet, reducing overhead and continuing to make money quite easily, WITH the potential for the "new" loans that will eventually be made, and a higher interest rate environment that will HELP the likes of BAC, then we have a growth story that is undeniable to most observers.
Dividend growth investors should select a stock or two that can add some wealth, in my opinion. Bank of America is one stock that I believe can do just that.
A two-year price target of $25-30/share is not ridiculous, and by allocating about 5% of our portfolio in a risk/reward growth stock such as BAC, we can see some healthy returns.
Disclosure: I am long BAC, XOM, JNJ, NLY, KO, SO, T, INTC, O, GE, CSCO, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.