Bank Of America: No Dividend Increase, No Worries

| About: Bank of (BAC)
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A popular SA author posted an article about Bank of America (NYSE:BAC) failing shareholders. The author makes some good points especially regarding BofA's massive balance sheet and the need for a dividend increase. I have been holding BofA since I bought in $5 range and I would love to see a dividend increase, but I am fairly content with BofA's new capital plan.

Bank of America will purchase $5 billion in common stock and redeem $5.5 billion in preferreds. BofA is redeeming BAC series H and series 8 preferreds. The weighted average cost of the preferreds is around 8.4%.

So by redeeming the $5.5 billion worth of preferreds, the company will stand to save $460 million a year in dividends. The cost of capital for preferreds is higher and makes plenty of sense why the redemption needs to happen.

Buybacks usually concern shareholders since its difficult to determine if they are happening simply to offset stock awards for executives. However, I believe BofA's $5.5 billion buyback is happening since management understands that the stock is significantly undervalued.

Bank of America trades at a Price/Book of .60. Honestly, at this price I would be very concerned if management wasn't buying back shares. The fact that they are buying shares should renew faith in shareholders that the stock is still cheap.

While the capital plan is nice, I can understand why some shareholders are still upset over the lack of a dividend increase. A .30% is simply not enough to get excited over, especially when banks such as Capital One Financial (NYSE:COF) decided to increase its dividend over 500% from the same level.

While a dividend increase would be nice, the new capital plan will clearly reward shareholders by increasing EPS. The preferreds will mean $460 million added to earnings. Then the $5 billion buyback is happening at an incredibly cheap price. I believe management is simply being cautious right now and this capital plan is still very good. I am confident a strong dividend increase will happen in the future.

Disclosure: I am long BAC. 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.