Bank of America Rewards Shareholders With A 53% Payout Hike After Sailing Through Fed’s Stress Test

Investors were looking for a significant increase in capital returns from Bank of America (NYSE:BAC) after the latest round of the Fed’s annual stress, and the banking giant did not disappoint as it announced plans to return as much as $26 billion to shareholders over the next twelve months late last week. This represents a 53% jump compared to the $17 billion in dividends and share repurchases Bank of America announced in 2017. Notably, if Bank of America sticks to this plan, then the payout figure of $26 billion over Q3 2018-Q2 2019 will be the highest ever for the bank over a twelve month period – bettering the bank’s $24 billion in total payouts for full-year 2006.

Under the new plan, Bank of American will hike its quarterly dividends by 25% – from 12 cents now to 15 cents a share beginning Q3 2018. This works out to total dividends of $6 billion assuming average outstanding shares of 10 billion. The bank will also repurchase $20 billion worth of its common shares over the next twelve months (excluding the additional $0.6 billion in share repurchases to offset an increase in shares from its stock-based employee compensation plan). We capture the trends in Bank of America’s dividend payouts as well as share repurchases over the years in an interactive dashboard, along with our forecast for these key metrics.

Historical Payouts

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 stockholders 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. Bank of America paid out less than $2 billion in total dividends over the four-year period from 2009 to 2013 – having to wait for five years before it could begin distributing any meaningful amount of cash to investors. Things improved in 2014, as an increase in quarterly dividends from 1-cent to 5-cents per share saw total dividend payout cross $1.25 billion. However, a calculation error in its CCAR submission that year resulted in the Fed restricting the bank’s share buybacks. While dividends were flat in 2015, share buybacks helped the total payout figure reach almost $4.5 billion. A sequential increase in dividends to 12 cents a share and bigger share repurchase programs helped total payout swell to $16.9 billion in 2017. Dividends are now expected to stand at 15 cents per share over Q3 2018 – Q2 2019.

Over the last ten years, Bank of America has returned $47.2 billion in cash to common shareholders, an average of $4.7 billion a year – representing about 78% of its average retained earnings of $6.1 billion for this period. The total dividend payout over this period has been roughly $22 billion, while share buybacks have cost the bank $25 billion, so the bank does not appear to prefer one method of returning cash over the other.

The chart below details Bank of America’s total shareholder payouts for each year since 2012, and includes our forecast for the next four years.

For 2018, we expect total dividends to be around $5.4 billion, as the annual dividend per share will increase to 54 cents from 39 cents in 2017. Also, at the end of 2017, the bank had authorization in place to repurchase $10.1 billion in shares over the first half of 2018. Taken together with $10 billion in proposed purchases for the rest of the year (half of the total proposed repurchases of $20 billion), this points to potential total share repurchases of $20.1 billion in 2018. The total payout for the year is, therefore, likely to be over $25 billion – representing 99% of our $25.75 billion forecast for the bank’s net income for the year. This should also make 2018 the best year for Bank of America’s investors in terms of total payout, as it easily surpasses the $24 billion in dividends and buybacks in 2016.

We factor in these payouts in our analysis of Bank of America in the form of an adjusted dividend payout rate (which is the total payout ratio), shown in the chart below. You can understand how a change in the bank’s adjusted dividend payout affects its share value by making changes to the chart.

If you don’t agree with our forecast, you can come up with your own by making changes to our interactive dashboard for Bank of America’s dividend payout and share repurchases.

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