Bank Of America Shares Could Be Worth $41 By The End Of Next Year

by Trefis Team
Bank of America
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Bank of America’s shares have gained considerably since late 2016 thanks to a combination of steadily rising interest rates, improving operating efficiency and a strong economic outlook. Notably, this helped the bank’s stock price rise above its book value for the first time in mid-2017 – nearly a decade after the banking giant’s ill-fated acquisition of Countrywide sent its share price crashing to an all-time low of $2.53 at the peak of the Great Recession. While shares of the diversified banking giant have largely traded around $32 over the last two months, we believe that they are likely to scale $41 by the end of 2019 – representing gains of nearly 30% in less than two years.

We estimated Bank of America’s share price over coming years using our interactive Dividend Discount Model for the bank, which forecasts the fair price using a set of simple questions related to three metrics:

  • Long-Term Dividend Growth Rate: After focusing on strengthening its balance sheet and clearing its backlog of legacy legal issues over 2011-15, Bank of America has hiked its dividend payouts substantially over recent years. The bank’s dividends jumped 56% in 2017 compared to 2016, which is an unsustainable dividend growth rate in the long run. We believe that the bank’s long-term dividend growth rate should be around 8%. This points to a change in dividend growth rate and actual dividends per share, as shown below:

  • Rate of Return: Our estimate is based on a rate of return (hurdle rate) of 10% for Bank of America, which is the figure commonly used for companies in the financial sector.
  • Share Repurchases: As banks tend to rely heavily on share repurchases to return cash to investors, we include their impact on the share price over the coming years by estimating how they will reduce the number of outstanding shares each year, as this effectively increases the dividend payout to each long-term shareholder. Bank of America repurchased shares worth $12 billion in 2017, and we expect it to continue to repurchase shares worth $12 billion each year over 2018-21. At the same time, we forecast the average share repurchase price to increase steadily for this period from $40 in 2018 to $52 in 2021. This implies that the bank will be able to repurchase a sequentially smaller number of its shares each year.

Based on the inputs as detailed above in the Dividend Discount Model, we forecast Bank of America’s valuation per share to reach nearly $41 at the end of 2019

Don’t agree with our estimates for Bank of America’s share price? You can come up with your own estimate by answering a few simple questions on our dashboard

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