Investors Should Just Keep Banking On Bank Of America

Summary

• Bank of America reported Q2 2019 results that beat the consensus bottom-line estimate. Additionally, the bank's operating results were impressive almost across the board.
• The interest rate environment is (and has been) a headwind, but I believe that investors should just keep banking on Bank of America as a long-term investment.
• Bank of America is my largest position, 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, as BAC shares are higher by approximately 19% over the last seven-plus months. However, the stock has still underperformed the broader market by a wide margin over the last 52 weeks.

Data by YCharts

Financials have been in the crosshairs for a while now as many pundits have questioned their near-term business prospects due to concerns in the economy and the weakening interest rate environment. These concerns have outweighed the sector's strong operating results, but I believe that risks have been overblown and that many of the financials, including BofA, are long-term buys in today's environment. Example A - BofA after its impressive Q2 2019 results.

Just Keep Banking on BAC, Strong Results Even In A Tough Environment

On July 17, 2019, BofA reported Q2 2019 results that beat the consensus bottom-line estimate by $0.03 but that fell a little short of the top-line estimate (missed by $30M). The bank reported adjusted EPS of $0.74 on revenue of $23.1B, which also compares favorably to the year-ago quarter.

Source: Q2 2019 Earnings Presentation

Highlights for the quarter:

Source: Q2 2019 Earnings Presentation

The most notable highlight, in my opinion, is the 200bps operating leverage increase on the [strongish] 2% YoY revenue growth. BofA has been on a mission for years to reduce operating expenses (remember, New BAC?), and the bank is now reaping the benefits from those efforts.

Source: Q2 2019 Earnings Presentation

Moreover, as a direct result, the bank's return and efficiency ratios have continued to improve quarter after quarter. For example, the bank's return on assets ratio has been on a steady upward climb since fiscal 2011.

Data by YCharts

At the end of the day, BofA's results for Q2 2019 (and actually for the last four quarters) show that this bank is well-positioned for the future. The bank has significantly grown its earnings over the last two-plus years, and its operating results continue to impress. The bank is definitely contending with a tough operating environment, but I believe that the biggest risk factor is related to a short-term headwind, i.e., interest rates, that does not change the long-term story for this bank.

The Headwind

The low (and weakening) interest rate environment has been the number one concern raised by pundits, and rightfully so, as rates have continued to face downward pressure over the last few months.

Source: fred.stlouisfed.org

The pressures from the interest rate environment are already being felt as the bank's net interest income was down for the second straight quarter.

Source: Q2 2019 Earnings Presentation

As a result, BofA's management team lowered their full-year net interest margin guidance for 2019 to 2% (from 3%). At the end of the day, the interest rate environment is definitely a headwind (a short-term headwind, if you ask me), but that is not a reason to sell your BAC shares. This bank has not only been able to report strong operating results through what has been viewed as a "challenging" environment for the financials, but it also has great long-term business prospects. And, it helps that the bank has a real capital return story to tell.

A Capital Return Story With Legs

Since 2016, management has focused their attention on buybacks over dividends, and the shareholders have been the direct beneficiaries.

Data by YCharts

The share count is down approximately 6.5% (to 9.5B) over the last year, and the bank just recently announced that its board approved a $30.9B buyback program. Based on today's stock price, management would be able to reduce the share count by another 11% over the next 12 months if the entire program is used.

BofA has also been able to return a significant amount of capital to shareholders in the form of dividends. The bank recently approved a 20% increase in the quarterly dividend (to $0.18), and I expect more of the same in the future.

Source: Fidelity

Remember, the bank will have the opportunity to ratchet up the payout in the future as the share count continues to decline.

BofA's capital return story has legs, and I believe that it is one of the main reasons to stay long the stock. Let us also consider the fact that BofA (along with the other banks) has not been this well-positioned from a capital standpoint in decades, if ever. The regulatory fallout from the Financial Crisis created an environment that forced the banks to better position themselves for potential downturns. As such, I believe that BofA should be viewed as a "safe" dividend payer that has promising long-term business prospects.

Risks

Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes BAC. 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.

Bottom Line

It's simple, long-term investors should just keep banking on Bank of America being a stock that is worthy of investment dollars. The bank's operating environment may not be ideal, but Mr. Brian Moynihan, CEO, and team have BofA well-positioned for 2019 and beyond. I believe that Mr. Moynihan does get the credit that he deserves. This CEO navigated BAC through its post-crisis years in an orderly fashion and created a bank that has promising business long-term business prospects. The operating results over the last two years prove it. And, from a capital standpoint, I believe that BofA is in a position to weather any near-term storms.

It helps the bull case that BAC shares are attractively valued at today's price (see here for my thoughts on the bank's current valuation). 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.

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.