Bank of America: BAC Stock Is a SAFETY Play?

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BAC stock - Bank of America: BAC Stock Is a SAFETY Play?

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Bank stocks are not supposed to do what Bank of America Corporation (NYSE:BAC) has been doing. They’re not supposed to jump nearly 40% in about four months, which BAC did after the election. They’re not supposed to be mega-momentum plays.

Bank of America: BAC Stock Is a SAFETY Play?

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However, BofA shareholders have seen a perfect storm of positive events.

Trump promised inflation, which means rising interest rates, and since Bank of America sells money, there should be margin improvement. Also, the scandal around Wells Fargo & Co (NYSE:WFC) led some investors seeking ethical safety to switch horses to BofA CEO Brian Moynihan.

The result is that BAC stock has outperformed the other big banks, despite earnings that beat estimates but fell short on measures like return on common equity. Traders jumped in.

But now that there is some concern that Trump will deliver what he promised Wall Street, in the form of cheaper government and lower taxes, some are taking their profits and walking away.

Should you?

Banks See Margins Ahead

There are reasons for concern, because Bank of America’s costs are rising.

Moynihan got a 25% raise, on top of last year’s 23%, and the line staff will be getting a “Sanders bump” to $15 per hour as well.

The bank should have room to run, however. There are going to be fewer employees thanks to automation. The bank’s price-to-book ratio has recently fallen to 0.95 — a very familiar place for shares for quite some time before the recent run-up — meaning its stock is worth less than the value of the assets it holds. Wells and JPMorgan Chase & Co. (NYSE:JPM) are selling at well over book value, so value is there for investors to capture.

Then there is the Federal Reserve, which signaled that the recent rate hike could be the first in a string of such events. A return to normal rates would be great news to Bank of America, and all other banks, because as our James Brumley points out, banks can now raise rates without raising the pittance they give savers to run accounts.

Banks in Normal Times

The last few months have been extraordinary for bank stocks, as the shock of the Trump win shifted expectations. But the “Trump trade” is now over and Bank of America needs to find its own growth catalysts.

What would normal times look like?

This is the first year since 1996 where the bank traded over $20 consistently, taking out the 1997 and 2004 stock splits. The stock would have to double again to regain the value lost in the 2008 crash.

While Bank of America took a lot of bad assets in the crash, like Countrywide Financial, it also took some good assets, in the form of Merrill Lynch. During the “dot-bomb” of 2000, bank stocks were a good place to be, the dividend being maintained and the shares losing just 20% during the year.

In normal times, banks represent safety. And Bank of America, the second-largest U.S. bank with almost $2.2 billion in assets, should be a safe place to keep your money. The fact that WFC still carries a higher market cap, despite having fewer assets, should give investors looking for safety yet-another reason to hold BAC stock.

Our Serge Berger suggests you buy this dip.

The Bottom Line

Safety, however, is not speculation. Safety means a steady return. BAC dividends represent just one-sixth of its earnings. They have yet to recover from the 2008 crash and bailout.

Normal times should mean the return of a normal dividend. Right now, Bank of America’s stock is yielding a paltry 1.3%. My guess is that higher dividends are in the bank’s future, but don’t let them mislead you. They would not mean you’re going to get a gain from BAC stock like the Trump bump again. They would mean a return to boring, bank stock normality, with single-digit returns the rule rather than the exception.

You can buy Bank of America as a bank stock — one that is still somewhat undervalued, but don’t buy it expecting huge capital gains.

Buy BAC for future income, buy it for safety, and buy it as an investment, not a trade.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/bank-of-america-corp-bac-stock-safety/.

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