The Fed’s Stress Test & BofA: $10.5 Billion Stock Reduction Plan Cleared

by Trefis Team
Bank of America
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Bank of America (NYSE:BAC) investors had reason to cheer late last week when the global financial giant announced plans to repurchase $5 billion of its shares over the year. [1] Although, the bank will stick to its token dividend of a penny per share for now, the Federal Reserve’s approval of this stock repurchase plan means that Bank of America will finally return a sizable amount of cash to its shareholders after a five-year hiatus since the economic downturn of 2008. The bank will be handing out an average of just $400 million in common stock dividends each year.

The bank will also redeem preferred stock worth about $5.5 billion this May allowing it to cut down on its preferred stock equity by a good 30%. The combined $10.5 capital outlay plan by Bank of America was welcomed by investors who led the bank’s shares about 4% high in trading on Friday. The bank’s shares closed above $12.50 that day – the highest since mid-April 2011.

We maintain our price estimate for Bank of America’s stock at just above $13.20 – a tad higher than the current market price.

It Has Been A Long, But Worthwhile Wait For Investors

Before the 2008 recession set in, Bank of America was notably generous with its policy of returning cash to investors – something evident from the fact that the bank paid between $7.6 billion and $10.7 billion in cash dividends to its common stock investors each year, over the period 2005-2007. The bank also spend an average of $8 billion over these three years, buying back its shares. But following the downturn, and the added burden from the acquisition of Countrywide and Merrill Lynch on the bank’s balance sheet, dividends dried up with the bank paying $1.6 billion in all, over the four-year period 2009-2012.

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
Common Stock Dividends 7,665 9,639 10,696 10,256 326 405 410 481
Shares Repurchased 5,765 14,359 3,790
Total 13,430 23,998 14,486 10,256 326 405 410 481

The proposed $5 billion share buyback plan will boost the effective payout figure for 2013 to around $5.5 billion as the bank will still pay a cent in dividends for each share every quarter this year. 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%.

And The Preferred Stock Redemption Will Help Cut Funding Costs

Bank of America plans to redeem its Series H and Series 8 preferred stock in May, for a total cost of about $5.5 billion. This is a sensible move given the interest rate of around 8.5% for these preferred stock series, which works out to an interest expense of nearly $500 million on them. The bank will be able to save this amount annually by retiring these chunks of preferred stock, and also cut down on preferred stock equity from its level of $18.7 billion at the end of 2012, to about $13.2 billion by the end of Q2 2013. It must be mentioned here that these preferred stock series are different from the Series T stock, which Warren Buffett holds since August 2008 (see Bank of America Strikes Deal for Buffett’s Endorsement).

This move help reduce Bank of America’s total preferred stock dividend payout slightly from the 7.6%-level it was at, in 2012.

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  1. Bank of America Plans to Repurchase up to $5 Billion in Common Shares and Redeem Approximately $5.5 Billion in Preferred Stock, Bank of America Press Releases, Mar 14 2013 []
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