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We are opening a new bullish trade on Bank of America (NYSE:BAC). Now that the stress of the Federal Reserve’s “stress tests” are in the rearview mirror, financial stocks are climbing higher, as they are now free to pay larger dividends and buy back more stock as they move forward with their capital plans, and BAC is no exception.
In fact, BAC is leading the way higher for many in the industry and has made a number of capital-plan announcements. The company plans to buy back $20.6 billion of its stock and is increasing its quarterly dividend by 25% — from $0.12 per share to $0.15 per share. It is also redeeming more than $800 million of its depository shares. All in all, these moves should go a long way toward boosting earnings per share (EPS) and increasing shareholder demand for BAC.
BAC is also riding the bullish wave of its most recent earnings announcement. The company beat revenue estimates by $340 million and earnings estimates by $0.06 — coming in at $22.61 billion and $0.63 per share, respectively — on July 16.
If the spread between 2-year and 10-year Treasury yields (a common measurement used to gauge the potential future strength of a bank’s net interest margin, which is the difference between what a bank pays its depositors to borrow their money and what it charges its borrowers to lend them its money, where a wider spread equals wider, more profitable, margins) can continue to widen and the share-buyback program moves forward quickly, BAC should continue to beat earnings expectations during the remaining two quarters of 2018.
With the stock successfully breaking above resistance just above $31 and closing the bearish gap that was formed on March 22, we are looking for BAC to continue climbing up toward resistance at $32.50 (the price level the stock had difficulty breaking through in January and February) as the S&P 500 continues to flirt with new all-time highs.
‘Buy to open’ the BAC September 21st $32 Call (BAC180921C00032000) for a maximum price of $0.57.
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