Bank Of America's (NYSE:BAC) stock has performed well so far in 2019, as BAC shares are up ~21% while the S&P 500 (SPY) is up ~16% over the same period of time. However, BAC shares are still significantly underperforming the broader market over the last year.
I am a well-documented Bank Of America bull (see my Seeking Alpha profile for more detail) and, in my opinion, the bank's Q1 2019 results shows that the long-term story for this large financial institution remains intact. In this article, I will describe the 2 reasons why I believe that Bank Of America is still a great buy even at current levels (slightly above $30 per share)
On April 16, 2019, Bank Of America reported Q1 2019 results that beat the bottom-line estimates. The bank reported adjusted EPS of $0.70 (beat by $0.04) on revenue of $23B (missed by $240M).
Source: Q1 2019 Earnings Presentation
The quarterly net income of $7.3B was a record for Bank of America, which is saying something for a bank that has been around for a long time. And more importantly, the bank again reported positive operating leverage as expenses declined by ~4%.
Source: Q1 2019 Earnings Presentation
Management had to contend with several factors that impacted the bank's top-line, which I believe should have been expected given the challenging operating environment, but Bank Of America's progress in the digital space is something to brag about.
Source: Q1 2019 Earnings Presentation
Digital is definitely the future, especially for financial services, so I believe that investors should be encouraged about the strong quarterly digital usage results. The Q1 2019 earnings were already covered in great detail on Seeking Alpha so, instead of going over the same information, I will focus on why specifically I consider Bank of America a long-term buy at today's price.
There are plenty of reasons to stay long Bank of America's stock, in my opinion, but I will focus on what I consider the top two reasons why BAC shares are a buy.
(1) Capital Return Story
Bank of America has a great capital return story to tell. The bank has been buying back shares hand-over-fist for the last five plus years and management's effort to reduce the share count will likely not end anytime soon. To this point, management repurchased $6.3B worth of shares over the first three months of 2019 and this is after they bought back $20.1B worth of shares in fiscal 2018.
Looking back, management has remained committed to buying back the stock. For example, the bank's share count is down ~11% over the last three years.
It is also important to note that the impressive buyback programs are materially improving Bank Of America's dividend growth prospects. The lower share count gives management the additional wiggle room to increase the dividend and they have been doing just that.
The dividend has grown by ~72% over the last five years. Additionally, investors should expect more of the same with the bank having a payout ratio only in the lower 20% range. As such, investors should expect another significant dividend increase for this bank in 2019 after the CCAR results are released.
Lastly, just consider this - management returned $7.7B of capital to shareholders over the first three months of 2019 (over 100% of the quarterly net income) and this trend will likely continue through at least 2019. What's not to like?
There are several ways to evaluate Bank Of America's current valuation but, in my opinion, BAC shares are attractively valued no matter how you look at it.
Based on the bank's own historical metrics, BAC shares are trading at attractive levels.
BAC shares last traded at current levels during the global market concerns of early 2016, which was a tough period of time to be invested in financial stocks. And while there are indeed economic slowdown concerns today, I believe that 11x trailing earnings is an attractive valuation for a bank that has been reporting record profits.
This point actually leads me to the next way to look at Bank Of America's current valuation, i.e., in relation to peers.
Based on trailing and forward earnings, BAC shares are trading at a deep discount when compared to JPMorgan (JPM) but at a slight premium when compared to Wells Fargo (WFC) and Citigroup (C).
Additionally, a price-to-book (and tangible book) comparison tells a similar story.
Two points: (1) Wells Fargo and Citigroup still have a lot to prove [Wells Fargo recently lost its CEO due to the ongoing internal issues and Citigroup has struggled to win over the market since the Financial Crisis] so Bank Of America deserves to trade at a premium when compared to these two banks, and (2) JPMorgan has definitely earned the right to trade at a premium valuation but, in my opinion, Bank Of America should be catching up from a valuation standpoint.
Lastly, the large financial institutions (including BAC) are trading at attractive valuations when compared to the broader market.
The margins and valuations for financials are completely out-of-whack when compared to the S&P 500. The low interest rate environment and the slow down concerns are coming into play but, in my mind, a lot is already priced into the stocks (including BAC shares).
Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes Bank Of America. I believe that the regulatory environment is actually improving, but this could change in short order.
From a macro standpoint, a deteriorating economy would eventually negatively impact the banking sector. Currently, there are some headwinds, but in my opinion, a recession is not in the cards in the near future.
Not mentioned in this article is the fact that Bank Of America has promising long-term business prospects, which I believe will play out in the years ahead. As I previously described, Bank Of America's bullish thesis remains intact.
There was a lot to like about Bank Of America's Q1 2019 results and, to me, this bank appears to be well-positioned for 2019 and beyond. Moreover, the two factors mentioned in this article (capital return and valuation) are reason enough to stay long the stock, in my opinion. It also helps that there are plenty of other reasons to remain bullish.
I believe that BAC stock will be a market beater over the next 18-24 months so investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.
Author's Note: Bank Of America is my largest holding in the R.I.P. Portfolio and I have no plans to reduce my position in the near future.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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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.