If money costs money again, you want to hold Bank of America (NYSE:BAC) stock.
Rising inflation means rising interest rates. Specifically, it means a bigger difference between what the bank pays for money and what it charges borrowers. In the September quarter, this drove net income in consumer banking to $3 billion, with net interest income of $11.1 billion. Net income of $7 billion was 58% ahead of the previous year.
Despite this the stock remains cheap, a price-earnings ratio of just 13.3, with a dividend of 21 cents that yields 1.9%. Most investors, it seems, don’t expect these good times to last.
The Bull Case
Bank of America is a conservative investment. If you have $1 million in your retirement account, like many baby boomers, the projected 10% gain at Tipranks means another $100,000. If you’re a millennial with just $10,000 to invest, it means just $1,000. That’s why young investors are more aggressive than older ones, taking more risk in the hope of fatter gains.
In 2021, however, BAC has been anything but a conservative investment. It’s up a fat 47%, double the gain of the S&P 500 average. Shares I bought in mid-2020 are up 69%. Bank of America is also one of the biggest holdings of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Warren Buffett is even happier than I am.
BAC stock is considered “asset sensitive” because many of its loans reprice as interest rates rise. The bank also makes more loans when business is good. Both these factors are working in its favor right now. When the omicron variant sent stocks down recently, those who bought shares of Bank of America saw a fast bounce back.
The Bear Case
Banks face more competition than ever for those loans, however. Automation is putting competitors on clients’ phones. Even the fat spreads of credit card lending are threatened, by buy now, pay later companies like Affirm (NASDAQ:AFRM).
Rather than lower its rates, BAC competes by piling on the perks, using the breadth of its loan portfolio and Merrill Lynch investment bank. Wealthy clients get more points, more travel and free stuff, as they deepen their relationships.
The bear case for BAC stock, and other bank stocks, is that the current gains can’t last. Goldman Sachs (NYSE:GS) thinks a bear market is “required” to wash out excess valuations. Bank of America itself is concerned that yields could fall below inflation.
The dividend yield on Bank of America stock is now well below inflation. The stock might not be doing so well except for a $25 billion buyback program. The result has been some analysts calling on investors to sell the stock.
The Bottom Line on BAC Stock
The sell calls are a good thing. You need willing sellers to keep a stock’s price moving higher.
That said, BAC stock is not for everyone. This year will likely prove to be an outlier. Gains of 10% are fine, compounded over time, if you have a nest egg. That’s what you should expect, steady gains on big balances that add up over time.
The outsized performance of Bank of America stock in 2021 is in anticipation of fatter profits next year and in 2023. When that news hits, the speculative bubble in the stock will burst. Young investors looking for fat gains might be wise to get out now, while older investors can hang tight and await fatter dividends.
On the date of publication, Dana Blankenhorn held long positions in BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories https://www.amazon.com/Bridget-OFlynn-Virus-COVID-19-Pandemic-ebook/dp/B09K8PSQC8/ at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.