Bank Of America: An Income Play With A Kicker

Mar. 23, 2019 10:32 AM ETBank of America Corporation (BAC)100 Comments
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  • Bank of America should be viewed as an income play because the bank has a healthy dividend and promising dividend growth prospects.
  • Investors should, however, not forget that this bank also has great long-term business prospects that should help propel the stock price higher.
  • I am long Bank of America and I plan to stay long the stock.
  • This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

Bank of America's (NYSE:BAC) stock has performed well so far in 2019 (up 9%), but BAC shares have significantly underperformed the broader market over the last year.

ChartData by YCharts

Financials have been under pressure since mid-2018 due largely to industry-specific factors (low interest rate environment, flattening yield curve, and increasing regulatory concerns), but I view the pullback in BAC shares as a great long-term buying opportunity. BAC has a strong bull case, which includes promising capital return prospects, so I believe that there is a lot to like about BAC shares at today's price.

A Legitimate Income Play

BAC pays a lower-than-average dividend, but it has significant dividend growth prospects. The bank's yield is slightly above 2%, which is the lowest dividend yield in its peer group - Citigroup (C), Wells Fargo (WFC), and JPMorgan (JPM).

ChartData by YCharts

Looking back, BAC has materially increased its dividend since the token $0.01 that was paid quarterly for years after the Financial Crisis.

Source: Seeking Alpha

The $0.15 quarterly dividend ($0.60 on an annual basis) may not seem like much, but it is a far cry from the $0.05 that was paid only a few short years ago. The bank has a 5-year dividend growth rate of ~72% and, more importantly, management still has the necessary wiggle room for further increases in the years ahead.

ChartData by YCharts

BAC's dividend would be approximately 26% higher (~$0.76 on an annual basis), if the bank had an average payout ratio.

The bank will first need to receive approval through the Comprehensive Capital Analysis and Review, or CCAR, process to raise its dividend, but, in my opinion, investors should expect for the impressive dividend growth to continue over at least the next two-to-three years. Moreover, let's not forget that management repurchased $20.1B worth of common stock in 2018 and the

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This article was written by

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Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Disclosure: I am/we are long BAC, C. 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.

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