If it were any other company, I’d have applauded the move; because it’s Bank of America (NYSE: BAC), I rolled my eyes.
The too-big-to-fail financial conglomerate that failed miserably in 2008 recently announced a 400%-dividend increase. In the same self-congratulatory press release, a $4 billion stock buyback is also forthcoming. The putatively pro-shareholder maneuvers are set to commence in the second quarter of 2014.
Excuse the sarcasm, but I’m less than impressed with BAC’s new shareholder-friendly facade.
The improved Bank of America dividend increase lifts its quarterly payout to a measly $0.05 per share from an even measlier penny. A $0.20 annual dividend on a $17 stock generates a 1% yield, which isn’t even a floor for most income-investors’ stock screens.
As for the $4 billion in future share repurchases, they will enable BAC to retire roughly 235 million shares (assuming the price hovers near $17 a share until the buyback is completed). BAC has nearly 10.6 billion outstanding shares, which means the buyback would retire round 2% of the float and drop the share count to just above 10.36 billion. (BAC also authorized the repurchase of outstanding warrants, so the reduction will likely be less.)
Chalk my indifference up to a long memory.
In 2008, before its reckless, morally hazardous follies – paying billions for Countrywide Financial and Merrill Lynch when both companies were actually insolvent – BAC paid a $0.64 quarterly dividend per share on 4.6 billion outstanding shares. Back then, BAC shares traded in the mid-$40s, not the upper teens, as they do today. In other words, BAC is still in the fledgling stage of clawing out of a massive crater of its own making.
I understand that BAC has been less aggressive in returning cash to shareholders due to Federal Reserve edicts. I also understand that investing is predicated on the future, not the past. Where BAC is going matters more than where it’s been.
So where is BAC going based on recent trends? If the immediate past serves as a guidepost, apparently forward. After all, BAC has made money three-consecutive years.
In the latest reported year, 2013, BAC earned $0.90 per share compared to $0.25 in 2012. Net interest income rose, but less than 4% year over year. Non-interest income, wealth-management and trading fees, spiked over 9%. This tells me that actual lending is going nowhere, but the wealth management and global banking businesses are on the upswing. Then again, they should be, considering we are in the midst of a five-year bull market.
Like I said, investing is about the future, I’m skeptical the near-past is a useful guidepost for the big banks. I have no faith in the too-big-to-fail concept. Even given its depressed share price, BAC still sports a $180-billion market cap. Its enormity propagates fragility. BAC is analogous to someone suffering from giantism: He appears imposing from the outside; inside he’s as sturdy as clay.
As for my memory, JPMorgan Chase (JPM) CEO Jamie Dimon’s unvarnished nugget of candor is impossible to forget. When explaining systemic financial crises to his daughter, Dimon said, “This type of thing happens every five to seven years.” Que sera sera.
Big Wall Street banks invariably find themselves in the epicenter of these crises. Five to seven years is fast approaching. I suspect that Mr. Dimon will be proven a profit.
If the goal is to capture dividend income from banking, focus on the nimbler regional banks. Most lack the Federal Reserve’s implied guarantee and the corresponding moral hazard that accompanies it. Most of us fly more cautiously and intelligently with no safety net.
Cullen/Frost Bankers (NYSE: CFR) and Community Trust Bancorp (NASDAQ: CTBI) are two of my favorites regional banks, and they have a long history of cautious, intelligent flying. Best of all, they continually earn money and raise their dividend year after year without having to hit the reset button.
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