Fed Approves Bank of America’s Plan To Return $8 Billion To Shareholders

-5.26%
Downside
37.92
Market
35.93
Trefis
BAC: Bank of America logo
BAC
Bank of America

Earlier this week, the Federal Reserve unconditionally approved Bank of America’s (NYSE:BAC) 2016 capital return plan as a part of its annual stress test for the country’s biggest banks (see Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again). Following the approval, the diversified banking giant announced plans to hike its quarterly dividends 50% from 5 cents now to 7.5 cents beginning Q3 2016. [1] The bank will also repurchase $5 billion worth of its common shares over the next four quarters.

Notably, Bank of America had only managed to secure a conditional clearance of its capital plan last year as the Fed took note of “weaknesses in certain aspects of Bank of America’s loss and revenue modeling practices and in some aspects of the BHC’s internal controls.” The fact that the bank admitted to an error in its capital ratio calculation in April 2014 played a role in the conditional clearance, but the fact that things went well with the regulator this time indicate that Bank of America has gotten things in order since then.

Given the bank’s roughly 10.3 billion outstanding shares, the 2016 capital plan entails a payout of just over $8 billion to investors over Q3 2016 – Q2 2017. We maintain our price estimate for Bank of America’s stock at $18.50. While our price target is about 40% higher than the current market price, the primary reason for this is the sharp sell-off in bank shares over recent months in anticipation of the U.K. leaving the European Union as key economic indicators point to weak growth figures in the near future.

Relevant Articles
  1. Trailing S&P500 by 26% Since The Start Of 2023, What To Expect From Bank of America Stock?
  2. Bank of America Stock Has An 83% Upside To Its Pre-Inflation Shock
  3. Bank of America Stock Is Trading Below Its Intrinsic Value
  4. Bank of America Stock Is Trading Below Its Intrinsic Value
  5. Is Bank Of America Stock Undervalued?
  6. Is Bank of America Stock Fairly Priced?

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

Before the 2008 recession set in, Bank of America was generous with its policy of returning cash to investors, paying out 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 on buying back shares. But the economic downturn, and the added burden from the acquisitions of Countrywide and Merrill Lynch, forced the bank to slash dividends – paying out less than $2 billion in total dividends between 2009 and 2013. Things improved in 2014, as an increase in quarterly dividends from 1-cent to 5-cents per share saw its total dividend payout cross $1.25 billion. With dividends were flat in 2015, share buybacks helped the total payout figure reach almost $4.5 billion,

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:

BAC_CapitalReturn_2016

After the economic downturn, Bank of America had to wait for five years before it could begin distributing any meaningful amount of cash to investors. Although dividends were at the token 1-cent figure for 2013, the bank bought back more than $3.2 billion worth of shares over the year. The next year, the recalculation error forced the bank to cut back on share buybacks, although dividend payouts jumped roughly four-fold. Dividends and share repurchases crossed the $2 billion mark in 2015 – helping total payout jump 52% that year.

For 2016, we expect total dividends to touch $2.5 billion as the annual dividend per share increases to 25 cents. Also, share repurchases are likely to be $4.9 billion ($2.4 billion from the existing share repurchase program, and $2.5 billion from the newly announced plan). This represents a total payout in excess of $7.4 billion for the year – almost 40% of the bank’s net income for the year based on our estimates.

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.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Bank of America to Increase Quarterly Common Stock Dividend by 50 Percent to $0.075 per Share; Authorizes $5 Billion Common Stock Repurchase Plan, Bank of America Press Releases, Jun 29 2016 []