Bank of America’s Dividend Boost, $4 Billion Buyback Plan Cleared

by Trefis Team
+7.88%
Upside
17.14
Market
18.50
Trefis
BAC
Bank of America
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It has been a long wait for investors in Bank of America (NYSE:BAC), but the banking giant has made it worth their while by strengthening its business model and balance sheet enough to hike dividends for the first time since the economic downturn. The bank received the Federal Reserve’s approval to increase its quarterly dividend from the token 1-cent per share level it has maintained for 5 years now, to 5 cents apiece from Q2 2014. [1] The announcement, which comes after the Fed detailed the results of its annual review of banks this Wednesday, also includes a plan to repurchase $4 billion in shares this year. Given the bank’s roughly 10.6 billion outstanding shares, the capital plan entails a payout of roughly $6 billion to investors by Q1 2015.

We maintain our price estimate for Bank of America’s stock at $18.50 – about 10% higher than the current market price – as the announced capital plan is largely in line with what we forecast for 2014.

See our full analysis for Bank of America’s stock here

Before the 2008 recession set in, Bank of America was quite generous with its policy of returning cash to investors – demonstrated by the fact that the bank paid between $7.6 billion and $10.7 billion in cash dividends to its common stock investors each year between 2005 and 2007. The bank also spent an average of $8 billion over these three years buying back its shares. But following the downturn, and the added burden from the acquisitions of Countrywide and Merrill Lynch, dividends dried up with the bank paying less than $2 billion total over the five-year period 2009-2013.

The table below summarizes Bank of America’s capital return figures for each year since 2005, and has been compiled using figures reported in annual reports:

(in $ mil) 2005 2006 2007 2008 2009 2010 2011 2012 2013
Common Stock Dividends 7,665 9,639 10,696 10,076 369 405 377 481 328
Shares Repurchased 5,765 14,359 3,790 - - - - - 3,220
Total 13,430 23,998 14,486 10,076 326 405 377 481 3,548

It should be noted that the value of shares repurchased by Bank of America in 2013 ($3.2 billion) is lower than the proposed figure of $5 billion last year as the financial reporting period is from January to December, whereas the capital plans are cleared over an April to March period. In other words, Bank of America can spend up to $1.8 billion this quarter as a part of the plan which was approved by the Fed last year.

The proposed 5-cents per share quarterly dividend will boost the total dividends paid by the bank in each quarter starting from Q2 2014 to a little more than $500 million. The bank will also initiate a fresh share repurchase program in April to buy back up to $4 billion worth of shares by the end of March 2015. We factor in these payouts in our analysis of Bank of America in the form of an adjusted dividend payout rate shown in the chart below. As this payout rate was not meaningful over 2008-2011, we represent it in the chart as 0%. You can understand how a change in the bank’s adjusted dividend payout affects its share value by making changes to the chart.

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Notes:
  1. Bank of America to Increase Quarterly Common Stock Dividend to $0.05 per Share and Authorizes a New $4 Billion Common Stock Repurchase Program, Bank of America Press Releases, Mar 26 2014 []
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