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Why Income Investors Should Avoid Bank of America Stock

bank-of-america

I warned readers about this train wreck earlier this month.  I refer to Bank of America (NYSE: BAC), the sorry excuse for a bank that wooed investors with a $4-billion stock buyback and a 400%- dividend increase.

When BofA declared its openhandedness, I was less than impressed. The 400%-dividend increase would have lifted the annual dividend payout to a mere $0.20 a share, while the buyback would have barely dented the mass dilution that has occurred since 2008.

Today I’m even less impressed.

It turns out the meager bone BofA  threw to investors had to be retracted. The Federal Reserve forced BofA to suspend its buyback program and dividend increase after determining the bank was under-capitalized by $4 billion.

BofA attributed its multi-billion-dollar shortfall to incorrect calculations related to key metrics dating back to its 2009 acquisition of Merrill Lynch. Given that Merrill Lynch was the source of the error means BoA has likely been running too lean on capital for years.

When I wrote about BofA in early April, its shares were hovering around $17. Today they’re hovering around $15. Why they are at that level is a mystery to me; $5 a share wouldn’t interest me in the least.

So to reiterate the obvious, I have no interest in BofA. Neither do I have interest in BofA’s too-big-to-fail, politically connected brethren. I refer to JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), and Goldman Sachs (NYSE: GS).

I have no time for these banks, because I’m convinced no one can really understands what they’re up to. Nor can anyone know if they’re properly capitalized. These “banks” long-ago ceased being banks, having morphed into black-box trading holes.

I’m hardly alone in my opinion. Only last year The Atlantic ran an exposé on big banks that resounded through most major media outlets.  One sentence in the exposé stuck in my mind. It was attributed to Paul Singer, who runs the influential investment fund Elliott Associates. Singer wrote, “There is no major financial institution today whose financial statements provide a meaningful clue” about its risks. I couldn’t agree more.

As for those who bought into BofA’s phony dividend increase and share buyback, you have my sympathies. Trust is the foundation for properly functioning markets. But my sympathies are somewhat tempered; there’s no need to buy what’s impossible to understand.  There are many other worthwhile alternatives, such as well-run local banks, from which to choose. These local banks are much more likely to do what banks traditionally do – take deposits, lend, and remain solvent.

This simple, under-appreciated act of sound lending can be a profitable and dependable business. I say that because I see profitable and dependable banks like Cullen/Frost Bankers (NYSE: CFR), Community Trust Bancorp (NASDAQ: CTBI), and BOK Financial Corp. (NASDAQ: BOKF). That these banks also happened to be first-rate dividend growers is no coincidence.

To be sure, these local banks aren’t earning $10 billion in 30 seconds trading leveraged reverse, upside down, credit default swaps – or whatever the gambling chip of the day might be – but they’re not losing 10 times that amount either. Perhaps one of these days the big national banks will finally learn that slow and steady always wins the race.  But I doubt it.

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