Entering text into the input field will update the search result below

Conflicting Outlooks On Bank Of New York Mellon

Geoff Considine profile picture
Geoff Considine


  • BK has a low total return over the past 15 years.
  • Current valuation is reasonable, with a forward P/E of 12.
  • Wall Street consensus outlook is bullish, with 5%-7% 12-month price appreciation.
  • Market-implied outlook (derived from options prices) is somewhat bearish.
  • I am compromising on a neutral rating for BK, but selling covered calls is worth considering.

Bank of New York Mellon (NYSE:BK) is a global financial services company, the world’s largest asset custodian, and the seventh largest asset manager. While the stock price has rallied so far in 2021 (largely due to rising interest rates), the last decade and a half has been fairly dismal. Even after rallying strongly from the COVID-driven decline in 2020, the stock price remains 6.8% below its January 7, 2020 close of $51.25. The current share price is also 16.5% below high closing prices from mid-2018.

Price history and basic statistics for BK (Source: Seeking Alpha)

The forward P/E of 12.01 and the forward dividend yield of 2.58% are reasonable. The 3-5 year consensus EPS outlook is for 10.95% growth per year. The 5-year dividend growth rate is 12.77% per year, with a 31.4% payout ratio so the dividend looks very sustainable. BK is also planning to resume buybacks in 2021, which will drive up the share price.

Trailing total returns for BK vs. Asset Management sector and U.S. stock market (Source: Morningstar)

The trailing total returns for BK are substantially below those of the Asset Management sector (and the market as a whole) for the past 3-, 5-, 10-, and 15-year periods. The trailing returns also lag the Invesco KBW Bank ETF (KBWB), in which BK is the 7th-largest holding (with an allocation of 4.25%).

Rather than provide my own projections for BK, this post discusses two consensus outlooks for the stock. The first is the Wall Street analyst consensus rating and 12-month price target. The second is the market-implied outlook, which is a probability distribution of price returns that are implied by the current prices of call and put options on BK. I also discuss the relative attractiveness of covered call strategies, given the market-implied outlook.

Wall Street Analyst

This article was written by

Geoff Considine profile picture
Geoff has worked in quantitative finance for more than twenty years. Before entering finance, Geoff was a research scientist for NASA. Geoff holds a PhD in Atmospheric Science from the University of Colorado - Boulder and a BS in Physics from Georgia Tech. Neither Geoff Considine nor Quantext (Geoff's company) are investment advisors. Nothing in any commentary here on Seeking Alpha or elsewhere shall be regarded as advice.

Analyst’s Disclosure: I am/we are long BK. 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.

I have sold covered calls on BK as described in this post.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (8)

14 Jun. 2021
I own BK and a few other big banks. The question is why not move the money to another stock with similar risk and better returns. BK is good, but is there a better option in the sector?
Hold right now.

They should sell the asset management business.
Geoff, thank you for another fine article. How do you think about shorter term covered calls? Where do you see the benefit of the Jan 22 expiration over a trade that would only reach out for the next 4 weeks or 6 months rather than 9 months?
Geoff Considine profile picture
@markustv I have not specifically examined the shorter-term options for BK. In general, however, with the Jan 2022 outlook and the analyst consensus, nothing would deter me from considering shorter-term positions. There is obviously more turnover if you are considering doing a series of shorter-term covered call sales and that has implications for the costs you incur on the bid-ask spread. Options tend to have wide bid-ask and, as such, you pay a penalty each time you trade.

Thanks for the comments.
Herbert 5223 profile picture
BK needs to add a few other revenue generating product areas that also generate a 12% risk adjusted ROE in order to have a PE ratio more like a regional bank growth stock. At this point, I consider BK to be more like a money market fund dressed up as a bank. Low earnings growth but very low risk.
Geoff Considine profile picture
@Herbert 5223 The option implied volatility, which is best source for volatility expectations, is not especially low for BK (32%), so I don't see this low risk. That said, it would be very odd if one could realize 7% in income from a very low risk bet...
Herbert 5223 profile picture
@Geoff Considine the pandemic increased all equity vols but the market seems to rectify that over time and differentiate the banks based on the true earnings exposure to the pandemic.. There will be some volatility in BK but it is related more to the systemic volatility of the equity market in general. Since BK’s business model is such low risk, the vols are needlessly overstated in my view and BK should be bought on significant dips. (My entire career has been in derivatives)
Geoff Considine profile picture
@Herbert 5223 You raise a good point here with regard to equity vols being elevated across the market and somewhat indiscriminately. This is part of what makes selling options look so attractive right now. I am not betting on the options being over-priced but my portfolio is intentionally positioned to benefit if they are. In my experience, quant models typically have a strong decay factor in how they weight trailling volatility into forward looking estimates. As such, it makes sense that vol was over-stated when we were near the COVID market drop in early 2020, but I would have expected the effect to have decayed away more than it has.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.