Is Bank of America (BAC) finally off the hot-seat it has been on since March, when owners of BAC stock learned they wouldn’t be seeing higher dividends after the bank did poorly on the Federal Reserve’s so-called “stress test”?
It looks like BAC did better with the make-up test in the meantime, although it still needs some work if it wants to stay in the Fed’s good graces the next time such a stress test is administered.
Nevertheless, with the Federal Reserve’s approval, BofA can start to raise its dividend payout and move forward with its plans to buy back $4 billion worth of BAC stock.
And yet BAC stock has continued lower ever since that news was unveiled on Thursday. Are Bank of America shares simply following the broad market’s current lead, or are investors trying to tell you something about the future of BAC stock?
A Long Road
The news was posted late last week, but to fully appreciate the saga we have to go back to March of this year. That’s when Bank of America was told by the Fed that its capital plan was lacking and would need to be corrected and resubmitted. Specifically, the Fed voiced concerns regarding the bank’s capital-planning process, including concerns about the way the BofA forecast losses and revenues.
Until the resubmission was given the green light, although the bank could continue paying quarterly dividend of five cents per share of BAC stock, it couldn’t increase its payout, and it certainly couldn’t move forward with its plans to buy shares back until its capital plan passed.
It was more than a gaffe. BofA was the nation’s only major bank to not fully pass its stress tests. Ergo, it was also the only major banking name to at least not have the option of upping its dividend.
The bank passed that portion of the test on the second try … more or less. The Fed said it did not object to the revised capital plan, but also added that Bank of America “must continue to make steady, demonstrable progress” before the coming year’s stress test.
No consequence of a unsatisfactory assessment of the bank next year was explained, but the Federal Reserve has the authority to lower or end a bank’s dividend and/or stock buyback program if it feels a bank poses too much public risk.
A Win-Win
The good news takes a great deal of pressure off of CEO Brian Moynihan, who has largely been blamed for some of the regulatory and procedural stumbles Bank of America has logged under his leadership. Indeed, as hedge fund Cougar Capital’s chief E.E. “Buzzy” Geduld explained it back in August, “If they fail this time, I’d call for his head.”
And, given that Cougar Capital owns 2.5 million shares of BAC stock, that may well have been a ball Geduld could have gotten rolling.
Fortunately it it’s a theory won’t have to be tested.
The real winners, of course, are BofA investors who have been patiently waiting for rising dividends and a big buyback to unlock the value of an otherwise compelling investment.
It’s not a well-recognized reality, particularly in the shadow of lingering revenue declines, but the pace of falling sales has all but come to a standstill, and profit margins have persistently widened to the high teens again. In fact, consensus estimates call for sales as well as per-share earnings growth in the coming year — the first such growth in a while.
That growth comes at a time — perhaps partially because of — the tighter standards and controls Moynihan and other officers had to put in place to fully satisfy the Fed the second time around in 2015.
Bottom Line for BAC Stock
While there’s always a slim chance Bank of America could end up back-sliding before its next stress test, it’s unlikely. Moynihan and the rest of the company’s leadership have gotten a pretty clear message from shareholders — time and tolerance from the market are all but gone.
If for no other reason than self-preservation, Bank of America’s management is now on the right path. It’s not going to deviate now.
Yes, BAC stock reacted poorly to the news … most likely because of the caution the Federal Reserve added to the re-assessment of BofA. Higher dividends are coming, though, and the company can actually afford to pay them. That’s enough of a long-term tailwind to hammer out some progress in the coming year.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
