Bank of America (NYSE:BAC) just reported earnings that beat estimates on the top and bottom line. The results are a clear reminder that Bank of America stock is one of the best among the big banks.
Strong quarterly results, along with great dividend growth and large share buybacks point to a bright future for Bank of America, as shown in the most recent quarterly report.
Bank of America posted another strong quarter with results that beat on both the top and bottom line.
Net Interest Income (NII) is a very important measure investors pay attention to when it comes to banks. Even with interest rates taking a big dive during the quarter, NII was still above where it was in Q3 2018.
The chart at the right chart shows NII has been essentially flat for over a year, which is consistent with revenue data from Estimize.
The chart at the right shows revenues have essentially been flat for near two years.
I do not believe investors need to make a big deal about the lack of revenue growth unless interest rates in the United States get close to zero or go negative.
Even with little revenue growth, Bank of America is a money-printing money machine when it comes to its ability to return cash to shareholders.
Credit Quality and Bank of America Stock
One of the important metrics to look at for banks is credit quality and provision for credit losses.
In the Q3 earnings report, the following chart shows charge-offs and the provisions for credit losses have both been trending down.
This is a good sign that there is not major stress in the loans the company is making.
Bank of America Stock Dividends and Buybacks
Bank of America has been a star performer when it comes to dividend growth.
The most recent dividend increase was a 20% hike going from $0.15/share to $0.18/share.
Even with the large dividend increase, the following chart shows Bank of America has a long way to go to get back to the dividend levels prior to the financial crisis.
As I detailed above, Bank of America is in very good financial shape, which has allowed them to increase the dividend significantly.
Going forward, I believe Bank of America stands to be one of the best dividend growth stocks the market has to offer.
The other side of the coin is share buybacks, which are going to be substantial over the next year.
After the CCAR results, Bank of America received approval for repurchasing up to $30.90 billion in stock from July 1, 2019 through June 30, 2020.
That equates to around 10% of the current market cap, which is astounding. The buybacks will help with EPS and allow further dividend increases in the future because of the lower share count.
The final piece of the puzzle is the valuation for Bank of America stock is attractive.
I compared the book value and tangible book value for the other big banks to Bank of America and found Bank of America to be in the sweet spot.
The data for the table below comes from the earnings reports of Bank of America, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC). I was surprised to see Bank of America is trading at a cheaper price than Wells Fargo. This is baffling to me because of all the problems at Wells Fargo.
If Bank of America would simply trade at the same price/book value as Wells Fargo, Bank of America would be a $33 stock or be 10% above where it is now. You may be thinking, “What about Citigroup”?
One of the main differences is revenue exposure. Bank of America has more exposure to the United States, whereas Citigroup is more globally focused. With interest rates negative in many places around the world, being more U.S. centric seems to be a better strategy.
Bottom Line on Bank of America Stock
Bank of America is a money-printing machine that reported strong results. The strength of the business has allowed Bank of America to return a substantial amount of cash to shareholders.
An added bonus is the fact Bank of America is a core holding of Berkshire Hathaway (NYSE:BRK.B). Just this week, a report came out showing Berkshire Hathaway wanted permission to be able to increase their stake above the 10% threshold.
As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.