During a recent Barron's interview, Bank of America (NYSE:BAC) CEO Brian Moynihan was in no mood to take a victory lap after the bank's strong first-quarter results. He instead remains focused on stability, cost cutting, and what he referred to as "responsible growth." In the following sections, we will detail the top three takeaways for the interview.
Top Three Takeaways
Capital return clarity
Moynihan isn't expecting a change from last year's capital return plans. In 2016, the bank returned $7.7 billion to shareholders. 70% was returned in the form of buybacks and 30% in dividends. He expects that ratio to remain the same for 2017.
Focusing the majority of the return on the buyback at present is a prescient move in my mind. Bank of America's share count has more than doubled since the financial crisis, and Moynihan stated reduction of shares at this price is a priority. He stated:
"We're down below 11 billion shares and we will keep chipping away at it."
Bank of America's shares are current trading for nearly half their all-time high of $54. I see this as a good use of the cash based on this fact. Currently, the stock's dividend stands at $0.30, which provides a yield of 1.18% per share. With the legal bills all paid up and profits on the rise, the bank can now focus on increasing the dividend and share repurchases. Basically, you have a chance to get in on the ground floor of this dividend growth story. I like it. On top of this, I suspect BAC's shares are currently on sale. This is the time to buy.
Interest rate take
Moynihan expects the Fed to hike twice more this year. The bank's CEO says these hikes will pressure Bank of America less than most, as a large portion of its deposits are in non-interest-bearing checking accounts. Moreover, Bank of America is well positioned to benefit from this rising rate environment.
This allows the bank to earn even greater profits on the difference between the cost of funding and lending rates otherwise referred to as the net interest margin (NIM). Taking into consideration the size of Bank of America's balance sheet, a small shift in interest rates can have a big impact on the bank's bottom line. What's more, Moynihan seemed indifferent when asked about declining Treasury yields. The CEO stated:
"The underlying economy is what we have to worry about, and the underlying economy is fine."
I love this answer. That fact of the matter is Treasury yields don't always correlate perfectly to underlying economic state of affairs. The U.S. economy is doing fine and that is what matters most. U.S. Treasury yields are down due to the instruments' solid safe-haven status. An enormous amount of money is flows into U.S. Treasuries from across the globe based on the recent spike in geopolitical tensions I surmise.
Focus on stable cash flow
Simplification of the company and an improved product mix have resulted in much more predictable earnings since the start of 2015. Moynihan stated:
"The number of different checking accounts offered drop to just four today from as many as 23 previously."
He also commented on the company's improved mix of loans. He stated:
"Now loans are nearly evenly split between consumer and commercial rather than the two-thirds consumer and one-third commercial that prevailed in 2009."
These two developments, along with the bank's continuous cost reduction and avoidance program, should augur further capital appreciation and dividend increases for year to come. Brian Moynihan and his team have done a tremendous job turning the bank around. Asset quality continues to strengthen, and the bank reported record capital and liquidity levels. Nonetheless, the bank currently trades for just 1.3 times tangible book. It traditionally trades for closer to two times tangible book value. With the bank currently trading essentially at tangible book value, the upside potential is vast at 85%. What's more, this substantially raises the margin of safety as well.
The Bottom Line
Bank of America is trading for a PEG ratio of 1.42 and a forward P/E ratio of 10.50. Further, the bank's forward P/E of 10.42 is lowest among the money center banks with the exception of Citigroup (NYSE:C). All these developments should provide a nice tailwind for the stock. Finally, a healthy banking system is one of the three pillars of economic growth. I'm bullish on Bank of America due to Trump's bank-friendly policies, a rising rate environment, and the bank's legal and regulatory issues coming to an end. Moreover, BAC has shown numerous areas of improvement on a fundamental basis. The risk/reward equation favors long trades at this time with a substantial margin of safety built in.
Even so, I suggest layering into a full position over time to reduce risk. Geopolitical tensions are at all-time highs, and stocks never go up or down in a straight line. Nevertheless, all the makings for Bank of America to rally are on the table. All Bank of America needs to do now is continue to execute. Those are my thoughts on the matter. I look forward to reading yours. Please use this information as a starting point for your own due diligence.
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Disclosure: I am/we are 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.