I may have gotten into Bank of America (NYSE:BAC) stock a little early last month.
Bank stocks are still in bad odor because money remains free. The Federal Reserve has said it will pour money into the economy even if inflation rises. A three-month Treasury bill now yields .13%, a 30-year bond 1.45%.
On the other hand, Bank of America’s 18 cent dividend rate, even if it seems modest, yields 2.82%. It was a nice ballast to have when Apple (NASDAQ:AAPL) fell 12% over 10 days.
It’s like the old investment adage. You don’t diversify your portfolio to make money. You diversify it to keep the money you have.
A Bank Going Nowhere
In a recent report, Bank of America analysts could have been describing themselves. Value stocks are “broken,” they wrote. While tech has been flying, stocks like Bank of America remain in neutral.
Forget the awards that CEO Brian Moynihan is racking up. Forget how the bank is finally integrating its brokerage operations into its apps, as rivals like Charles Schwab (NASDAQ:SCHW) did years ago.
Look at the basics. At its Sept. 10 opening price of about $25.45 per share, BAC stock was selling at less than 13 times earnings, and there’s that dividend. The bank’s market cap is $221 billion. That’s roughly the value of Netflix (NASDAQ:NFLX). A 100-year old bank is worth little more than a 25-year old streaming service.
How is that possible? One reason is that the bank’s revenue has been stagnant for three years now. Its merchant card processing, provided by Fiserv (NASDAQ:FISV), is barely competitive. If you or your business need to borrow money, there are easier ways to do it. Even the mortgage business is being taken over by non-bank banks.
A Bank Running Right
Despite the caution there are analysts saying buy BAC stock. In fact, they’re saying you should buy it because of the caution.
Shares are down 27% for the year, but with a well-run company that’s called a bargain. When fear rises, as it did early this month, big banks start looking attractive. The bank got through the pandemic panic of the second quarter in good shape. An improving economy later this year and into next year means it could soon start buying back its stock again. Even a rumor of buybacks’ return will boost the price of BAC stock.
Bank of America isn’t just cheap compared with tech stocks. It’s cheaper than most other banks. The price-to-book ratio is below 1. JPMorgan Chase (NYSE:JPM) is trading at about 1.3 times book.
The stock’s latest drop was caused by a rise in reserves for credit losses. That is, it didn’t see more losses, it just booked reserves against them. Trading revenues and fees from investment banking were up sharply in the most recent quarter.
Warren Buffett of Berkshire Hathaway (NYSE:BRK-A) is still Bank of America’s largest shareholder. It’s his second-biggest position, after Apple. He says, “banking is a good business if you don’t do dumb things.” Bank of America isn’t doing dumb things. Big banks get 12% returns on net tangible assets, and no bond can do that without spectacular risk.
The Bottom Line on BAC Stock
A trader, like our John Jagerson or Wade Hansen of Strategic Trader, can use covered calls in Bank of America to protect their portfolio.
I prefer to think of a bank stock as the ballast in my portfolio. It doesn’t power me ahead, but it gives me stability in heavy weather like we’ve seen in September. If your portfolio is big enough to need ballast, here’s how you get it.
On the date of publication, Danma Blankenhorn owned shares in BAC and AAPL.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
