When you watch a game, whether it’s a pitcher’s duel in baseball, a defensive struggle in football, or a goalless soccer match, you know those who aren’t into your sport are going to call it boring.
To this you will reply that defense wins championships.
The same is true for investing. Making money is fun, but keeping money is winning. That’s why you keep some money in a stock like Bank of America (NYSE:BAC). With a dividend yielding 2.04% and a price-to-earnings ratio below 11, its gains for the year are right in line with those of the market averages. But it’s steady — a defensive play.
When companies like this report earnings analysts tend to become breathless, looking for any chink in its armor. There are chinks. There are reasons to worry.
But Bank of America is mainly a proxy for consumer banking and consumer spending. Its profits come from its credit cards, where it’s the fourth-leading issuer, from simple checking accounts, and from mortgages, which look healthy.
The consumer is the major risk for Bank of America stockholders, and in the second quarter the consumer was healthy. This let results exceed analyst estimates, with net income of $7.3 billion, 74 cents per share fully diluted. The only part of the bank where results went down was global banking, where net income was down 9%, even with deposits up 12% and loans up 5%.
The phrase that jumped out in the press release from CEO Brian Moynihan was “responsible growth.” The bank is aware that the last recession was centered in the banking business. CFO Paul Donofrio was thus filled with worry during the bank’s conference call, anticipating two interest rate cuts this year from the Federal Reserve, and lower interest rates that could cut growth in net interest income to 1%, half what it was last year.
But slower growth is still growth. Bank of America is still growing, and that growth looks sustainable.
The payoff for investors is always the dividend. The current yield of 2.04% is based on a 15 cent per share dividend and is less than the rate on the 10-year U.S. bond, now 2.04%. But the bank said during the conference call it will increase the payout by 20%, meaning investors can expect 18 cents per share soon.
That brings the forward yield up to 2.44%, at its July 18 opening price of $29.22 per share. Compare that to the rate on the 30-year bond, almost 2.6%. The bank also intends to buy back as much as $30 billion in shares during the year, over 10% of the shares outstanding, to keep the share price up. For 2019 so far, the shares are up 19.7%.
The Bottom Line for BAC Stock
There are two manageable risks in Bank of America stock: fintech and the possibility of recession.
The risk of a recession is real, but if there is a downturn, investors will look for financial strength. Bank of America has assets of nearly $2.4 trillion.
You don’t want to overload on defensive stocks like Bank of America but having some in a balanced portfolio will keep you sane when there’s a real panic. Defense still wins championships.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.