Bank Of America Certainly Did Not Fail Shareholders

| About: Bank of (BAC)
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Recently, esteemed Seeking Alpha contributor Regarded Solutions wrote a piece in which he posited that Bank of America (NYSE:BAC) management had "failed" shareholders. His reasoning was based solely on the fact that BAC decided to go with a huge share repurchase program instead of a dividend increase following the Federal Reserve's CCAR results earlier this month. I will respectfully disagree with the author in this case and I believe the market has agreed with me. After the announcement, BAC shares immediately shot up 4%. If this doesn't signify that BAC did the right thing, I'm not sure what does.

Ultimately, the market has the final say in whether or not a company did the "right" thing and this instance is no different. I'm not certain how a stock the size of BAC moving up a massive 4% on the back of an announcement constitutes management "failing" shareholders. It seems to me that the job of a Board of Directors is to make the stock worth as much as possible in order to provide returns to shareholders. BAC has done this as the market's reaction to its repurchase program was overwhelmingly positive.

I understand the want or need for a dividend but I also understand that buying back shares that are trading below even tangible book value is a great idea for a turnaround story like Bank of America. Current income is an important part of many investors' portfolios but BAC is not the bank it was when it was paying a robust dividend. The bank is still in turnaround mode and as such, I agree with the decision to withhold dividend increases until a later time. BAC is investing in its shareholders' futures by repurchasing expensive preferred stock and common shares that are trading well below book value and even under tangible book value. This expenditure will pay dividends forever as BAC's earnings will now be spread over fewer shares, boosting earnings per share and the stock price. In addition to that, the bank will be saving hundreds of millions of dollars per year in foregone interest expense on the preferreds it is redeeming.

Even if you disagree with share repurchases, one must realize that the 4% one-day pop in BAC shares is over a year's worth of dividends for all but the highest-yielding stocks. If total return is what you are seeking, a dividend increase that pays you an extra 2%, for instance, over the course of a year is nowhere near as valuable as a one-day gain of 4%. Therefore, regardless of your personal view on the efficacy of the share repurchases, simple math dictates that the decision was a good one for shareholders based on the fact that the stock made more in capital gains in one day following the announcement than a dividend would have provided for at least a year.

The point of this discussion is to note that BAC is not in a position where it should be worrying about its dividend rate; such a policy is for well-established, mature stocks. BAC used to be that type of stock until the financial crisis and some very poor decisions derailed the bank into losing massive amounts of money and accepting a federal bailout. Since then, however, BAC has been in turnaround mode and quite successfully at that. As such, BAC should be thought of as a growth stock and not a dividend payer. BAC will once again be a dividend stock but the time for that is not now. I applaud the company making the right decision to repurchase very cheap shares instead of a nearly meaningless increase in the dividend rate. With everyone expecting the Board to make the easy decision to raise the dividend, they instead did the right thing and announced a share repurchase plan. As a result, shareholders will be rewarded for years to come via higher EPS and share prices. The Board certainly did not fail shareholders and in fact, this was the best possible move the Board could have made.

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.