The Most Intriguing Thing About Bank Of America's Dividend Hike

| About: Bank of (BAC)
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A few news outlets are reporting that CEO Moynihan actually wanted to reward shareholders with more than a $0.05 quarterly dividend.

After Moynihan's ambitious plans this time around, in addition to his dividend attempt in 2011, investors can finally determine managerial intent regarding the dividend post-crisis.

The Fed concerns about Bank of America's raise are not particularly substantive, considering each penny of the dividend only costs Bank of America $100 million.

There is perhaps no company in the past decade that has destroyed shareholder equity quite like Bank of America (NYSE:BAC) has. It's almost mind-boggling to try and document just how extensive the pain has been for this one-time blue chip holding, which saw steady annual profits of $21 billion in 2006 collapse to annual losses of $2 billion by the end of the financial crisis. Not only did the company wreck its long-term earnings power, but it also heavily diluted its share owners at the worst time possible, in the midst of a crisis. At a time when Bank of America's stock price was careening into the low single-digits, the company was forced to raise capital and doubled the share count from 4.4 billion in 2007 to 8.7 billion in 2009.

We almost always speak in strictly economic terms here on Seeking Alpha, but this mismanagement of the dividend and shares outstanding has imposed a human toll:

Many Charlotteans are Bank of America shareholders and once relied on dividend income from their stock.

"It's just a tragedy for this community because two or three generations of wealth got wiped out," outspoken Charlotte stockholder John Moore said of the years with a small dividend and historically low stock price.

That's a quick summary of the narrative for Bank of America shareholders during the old regime with Ken Lewis at the helm. Now, here we are in March 2014, and we've been greeted with Bank of America's watershed moment - the first dividend increase in seven years. As every Bank of America shareholder and their friends know by now, the company has increased the quarterly dividend from $0.01 to $0.05, in addition to plans to buy back $4 billion worth of stock once the current $5 billion buyback plan expires next quarter.

But what doesn't get reported as frequently is this fact - Bank of America actually tried to raise the dividend to a level above the $0.05 figure. As the Charlotte Observer, well, observed:

The dividend increase comes a week after the Federal Reserve released the results of its annual stress tests, which test the nation's largest banks on whether they'd be able to keep minimum capital ratios in the event of a severe economic downturn.

Bank of America passed the stress test, but its capital levels came in lower than many of its peers. Based on the results, analysts had said the bank's capital plans might be thrown into question.

Indeed, Bank of America was forced to resubmit its capital plan after some ratios fell below what is required in a severely adverse downturn, the Federal Reserve said Wednesday. The bank had to revise down the level of capital it would return to shareholders.

This is not the first time that Bank of America has been rebuffed by the Feds. Two years ago, this week, the Feds rejected Bank of America's request for a dividend hike:

Bank of America revealed on Wednesday that the Federal Reserve had rejected the bank's plan to increase its dividend in the second half of 2011, even as it agency has permitted dividend increases at several other big banks.

The burning question for Bank of America shareholders these past couple of years has been this: What exactly is the intention of the Bank of America management team and board when it comes to raising the dividend? We can look at the balance sheet and see that the company's net profitability has normalized; the bank made $11 billion in profits in 2013, and should make between $13 billion and $15 billion this year.

For those of you who have been intrigued at trying to figure the bank's intent with the dividend, I think we learned a lot by the fact that Bank of America not only tried to raise the dividend two years ago, but also wanted to raise the dividend to an amount higher than $0.05 this time around. This tells us something about Bank of America's intent regarding the dividend; the company is getting about translating profit restoration into dividend restoration.

Now, of course, it's fair to wonder whether Bank of America acted recklessly by asking for an amount that is greater than what the Fed approved. But what you should keep in mind is this: Bank of America's Tier 1 Capital Ratio is very sound right now at the 10% mark. The 5.3% figure that you keep hearing about is what the Fed estimates would happen if American stocks lost half their market value, and then they estimate what the bank's capital ratio would be at the lowest point of a hypothetical recession.

While better than nothing, these bank stress tests have an element of "the general fighting the last war" to them. The test is constructed based on the financial crisis of 2008-2009 repeating itself. It completely discounts the fact that the next financial crisis might look quite different than the last one, and the stress tests attempt to divine a false sense of certainty in that respect. Each penny increase in the dividend costs Bank of America about $100 million (that is, $400 million annually). Heck, the company just settled another $9 billion lawsuit yesterday. Quibbling over a penny or two in the dividend seems more like posturing rather than concern about whether Bank of America can actually afford it.

The intriguing thing about yesterday's increase is that we received some insight into Bank of America's intent regarding the dividend going forward. Since Moynihan has taken over, he has shown a willingness to try and take care of income investors. First, he tried to raise the dividend in 2011. Now, he tried to raise the dividend to a rate higher than $0.05 per share each quarter. This should be good news for dividend investors that follow Bank of America's reported profitability each year. Moynihan has signaled to us a willingness to translate profit restoration into dividend restoration as well.

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.