One of the best reasons to hold Bank of America (NYSE:BAC) stock these days is the generous dividend. But it’s those dividends that are catching the attention of federal regulators during the novel coronavirus. So Bank of America stock now warrants some new scrutiny by investors.
Bank of America, as well as other major U.S. banks, had aggressive stock buyback programs last year. These buybacks came as a tax reform package pushed by President Donald Trump, and they allowed corporate profits to soar.
BAC announced plans last summer to buy back $30.9 billion of Bank of America stock while raising its dividend by 20%. The buyback program would include more than 10.9% of all shares outstanding.
Unfortunately for shareholders, those plans were put on hold in March, when the novel coronavirus struck and sunk the economy. Bank of America joined a group of the nation’s biggest banks in announcing suspensions of buyback programs. This move allowed banks to instead put money into the economy.
The Pandemic Put Dividends Under Pressure
Were those moves are enough to help support the economy? Are even more measures needed to protect the banks’ balance sheets? Investors should note the risks with big banks, especially as the country is now officially in a recession.
The minutes from the Federal Reserve’s April 29 meeting should raise red flags for dividend investors. In the commentary, the Fed speculates that upcoming stress tests may require banks to draw up plans for “further limiting payouts.”
And the Fed isn’t the only institution raising questions. In May, Kristalina Georgieva, managing director of the International Monetary Fund, urged banks to suspend all programs to return value to shareholders. Her advice included share buybacks and dividends.
“One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations,” she wrote in an editorial posted on the IMF’s website.
Bank of America’s Healthy Dividend
Currently, Bank America stock includes a 2.6% quarterly dividend that equates to 72 cents per share.
That’s one of the most attractive things about BofA these days, as it and other financial stocks have been left behind by the stock market rally. Overall, Bank of America stock remains down nearly 30% on a year-to-date basis, while the Dow Jones Industrial Average is down only 8%.
In its most recent earnings report, Bank of America announced it posted a profit of $4 billion even though its profits fell by 45% from the prior year. It also put aside nearly $4 billion for credit losses.
That’s a good hedge considering the nation’s unemployment level is expected to remain in double digits for the rest of the year. Customers may have trouble repaying credit cards, car loans and mortgages.
The Bottom Line on Bank of America Stock
There’s one thing I want to make clear — I’m not a fan of the big banks. However, Bank of America admittedly holds some promise in this situation.
Bank of America stock is trading at a discount right now, but BAC’s growing dividend is the best reason to hold BofA stock. The dividend has increased each year for the last four years and Bank of America currently shows a payout ratio greater than 45%.
Investors should be mindful of any Federal Reserve pressure for banks to reduce or suspend their dividends this year. And BAC’s overall C rating in my Portfolio Grader tool is reason for caution.
But for now, Bank of America stock is highly recommended in my Dividend Grader tool. There it’s ranked as a strong buy and has an A rating.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
