Bank of America Just Raised Its Dividend 14%. The Buyback Is the Bigger Story.

A typical dividend raise from a blue chip stock usually isn’t very major, with most coming in the low single-digit range. That sure wasn’t the case with Bank of America (NYSE:BAC) on Friday, as the big lender cranked its quarterly payout 14% higher.

That’s actually more or less in line with the dividend raises of other major banks. But what sets this one apart is that the generous bump is paired with another shareholder-pleasing program that’s unusually robust.

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Double-digit difference

Before we look at that, let’s shine a light on the dividend raise, as it’s substantial and therefore worthy of a few words.

With that 14% increase, Bank of America’s next quarterly distribution will be $0.32 per share. This is scheduled to be paid on Sept. 25 to investors of record as of Sept. 4. It would yield almost 2.1% on the company's most recent closing stock price.

In the words of company CEO Brian Moynihan, that double-digit enhancement “reflects the strength of our earnings, the power of our franchise and our confidence in Bank of America’s ability to drive long-term growth and create value for shareholders.”

Moynihan is paid well to make such pronouncements, but in this instance, it’s justified. Recent developments with the company have been largely positive, such as its passing of the Federal Reserve’s (Fed) annual bank stress tests (with flying colors, no less). Mere weeks after the test results were released in late June, Bank of America published its second-quarter earnings. These showed robust year-over-year increases in fundamentals like revenue and profitability, and upticks in core items such as deposits and loans/leases.

40 billion reasons to like this lender

So there are increasingly more greenbacks for Bank of America to devote to shareholder remuneration. These funds also back up the company’s share repurchase program, and that’s a doozy these days.

In its dividend raise announcement, the company made sure to mention that it has plenty left in the tank with the initiative.

It was approved last August by the bank’s board of directors, which authorized $40 billion for such purchases. The company hasn’t been shy to dip into this; in the first half of this year alone, it spent $13.2 billion on buybacks, which makes the half-year total dividend outlay of $4 billion — more than many companies spend on shareholder payouts in their lifetimes — look small by comparison.

Those purchases, combined with the 2025 buys, have left roughly $17 billion under authorization in the program. Companies typically buy back their own stock as a means of supporting its price, and/or lifting future earnings per share (EPS) amounts to desired levels — repurchased shares are either retired or banked as treasury shares; either way, they are removed from the public float.

An impressive backup

Since reporting those second-quarter figures, Bank of America stock has — justifiably, in my opinion — outpaced the benchmark S&P 500 index. So, at the moment, it doesn’t necessarily need the support that a well-funded share buyback initiative can offer. Still, it’s comforting that there are billions of dollars ready to be deployed in case such assistance is needed. That helps boost investor sentiment on the stock.

Generally, I don’t think it’s wise to transact in any company’s shares primarily on the strength or weakness of its equity repurchase program. Yet Bank of America’s is immense enough to make a difference. Combined with that meaty dividend raise, the direction in which its fundamentals are going, and the decent health of our economy despite some potential headwinds, the company’s stock looks like a very strong buy candidate now.

Bank of America is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.