Bank of America Corp (NYSE:BAC) has been the best big bank to own in 2017 because it is making up for lost time. From a 52-week low of $14.81 in November, BAC stock has added more than 55% to reach current levels.
During the financial crisis, Bank of America acquired Countrywide Financial, the mortgage banker at the heart of the crisis, and was induced to acquire Merrill Lynch, the large investment bank. So when banks were told to pay for their crimes of the last decade, Bank of America was hit hard.
Even after the fines stopped, the Dodd-Frank “stress tests” meant the Federal Reserve kept a lid on Bank of America dividend increases. Only in the last year was the bank allowed to pay out as much as 24% of its earnings.
After the hurricane of the 2008 crisis, in other words, Bank of America was forced to get stronger.
Playing Catch Up
While Bank of America has been forced to squirrel away its earnings, JP Morgan Chase & Co. (NYSE:JPM) was given the go-ahead to pay its shareholders, and now delivers 33% of net income back to its investors. Bank of America is financially stronger than before the crisis but is still playing catch-up when it comes to rewarding shareholders.
Back when Bank of America was considered a very weak bank, in the wake of the crisis, Warren Buffett became its chief ally. In 2011, he put $5 billion of Berkshire Hathaway Inc. (NYSE:BRK.A) cash into BAC, in exchange for preferred shares and warrants to buy another 700 million shares.
Buffett exercised those warrants, which had a strike price of $7.14. Since the stock is currently trading at over $23 per share, the word you’re looking for is cha-ching. Berkshire Hathaway is now the bank’s largest shareholder. This is not a problem for other shareholders because Buffett insists Berkshire’s in the bank for the long run.
Still Undervalued?
The sun is shining on bank stocks generally, evidenced by the 22.5% gain in the past year in iShares Dow Jones US Financial Svc. (ETF) (NYSEARCA:IYG), which focuses on the U.S. financial services industry. BAC stock is the exchange-traded fund’s second-largest holding, at 8.7% of the roster.
So, with Buffett’s endorsement, the dividend catch-up, and favorable financial services winds — especially for those companies that handle both consumer and investment banking like Bank of America does — a lot of people are calling the stock a buy.
Bank of America’s key franchises are in taking deposits and making loans through credit cards. This is the opposite of what its units had been doing before the crisis, with Countrywide pushing dodgy mortgages and Merrill chasing deals. In fact, Merrill is no longer even called an investment bank. It’s a “wealth management” company.
The heart of the bank’s bull run came right after the 2016 election, however. Over the last three months the stock has gained just 1.6%, hit by low inflation and the Federal Reserve’s inability to raise interest rates that deliver margins.
As a result, some InvestorPlace writers have turned cautious. Our Luce Emerson even suggested that it’s time to take profits. Loan growth is slowing, especially mortgage loan growth. The expectation of a “Trump boom” also hasn’t materialized, notes Josh Enomoto, and this has hurt the big banks’ stocks.
The Long Run For BAC Stock
The late 2016 run-up was indeed an aberration, and the big dividend gains of this year may not be repeated. That means it’s time for traders to be replaced by investors in Bank of America stock.
That is mostly good news, writes our Lawrence Meyers. There are long-term tailwinds for the banks as millennials enter their prime income-earning years and the bank continues to deliver solid earnings.
The stock’s breather may even be a good thing, writes Ryan Fuhrman. The recent sluggishness means that the bank again trading below its book value and its return on equity can still improve. If it can get that into double-digits, expect that the stock will rise further.
For millennial investors, who are also making up for lost time in their lives, Bank of America is a good, conservative place to put your money. Not just your paycheck, but your investment dollars. Assuming all banks have learned their lessons from 2008, and don’t go running back to the dog track, your money is safe there.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
