Bank of America Is the Big-Bank Holdout After This Year's Stress Tests. Here's What Its Next Move Could Look Like.
Key Points
Large banks recently underwent the government's stress test, designed to ensure the safety of the global financial system.
Having passed with flying colors, most big banks increased their dividend.
Bank of America chose not to, for now.
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Like all of the large banks that underwent the Federal Reserve's bank stress test, Bank of America (NYSE: BAC) passed. However, after passing, many of the other big banks announced sizable dividend increases. For example, Goldman Sachs (NYSE: GS) hiked its dividend by 11%, while Citigroup (NYSE: C) increased its dividend by 12%. Bank of America, by contrast, didn't increase its dividend. But investors shouldn't worry, a dividend hike is likely on the way.
Bank of America: It's just a timing issue
Over the last few years, Bank of America has increased its dividend in the third quarter. The dividend increase is announced alongside second-quarter earnings. Bank of America will report second-quarter earnings in a couple of weeks. Basically, management is simply waiting until the normal time it makes dividend announcements, given how close the results of the Fed stress tests were announced relative to earnings season.
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In other words, Bank of America's choosing not to announce a dividend increase is probably not a sign that something is wrong with the company. The real question here is how large the increase will be. Obviously, that's entirely up to the board of directors. That said, the last two annual dividend increases were 8% and 7%. Both are sizable compared to the historical inflation rate, which is closer to 3%. It is reasonable to expect the next hike to be larger, though probably not dramatically so, since the last two increases were fairly generous.
A discounted price could be a buying opportunity
What's interesting is that Bank of America's price-to-earnings and price-to-book ratios are lower than those of JPMorgan Chase (NYSE: JPM) and Goldman Sachs, suggesting it's a value play in the banking sector. Meanwhile, Bank of America's P/E is lower than Citigroup's, even though Citigroup's P/B ratio is lower. So, it could still be viewed as the value option, given that Citigroup's stock has risen 60% over the past year, compared with Bank of America's 20%.
A dividend increase from Bank of America is unlikely to close the valuation gap in one fell swoop. But it will still be a nice reward for investors and provide a reason to stick around for the long term, allowing the market more time to close the valuation gap. Given that Bank of America's roughly 2% dividend yield is currently higher than its peers', income-focused investors should probably take a close look at the stock before it reports second-quarter earnings (and a likely dividend increase).
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Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.
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