Linked here is a PDF copy of my detailed analysis of Bank of America Corporation (BAC) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Bank of America Corporation is a financial holding company providing banking and nonbanking financial services in the United States and internationally.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. BAC is trading at a discount to only 1.) above (Avg. High Yield Price ). If I exclude the high and low valuation, and average the remaining two valuations, BAC is trading at a significant premium (26.0%). A Star is deducted since BAC is trading at a premium in excess of 5%.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. BAC earned one Star in this section for 3.) above. BAC has grown dividends for at least 10 years. It has paid a dividend since 1903 and has increased them for the last 20 yeas. Last years dividend payout was 73%, up form 46% in 2006. Since the increase was in excess of 15 point, a Star is deducted, leaving a net of zero Stars in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. BAC earned two Stars in this section. BAC's NPV MMA Diff. is a strong $27,956 and is current earning more than the 4.61% money market rate.
Other: BAC is a member of the S&P 500, an Aristocrat and an Achiever. BAC has strong business fundamentals, a good customer base, a diverse product line and large geographic presence. These factors should help it to withstand a major economic downturn. BAC should continue to benefit favorable interest-rates.
Conclusion: BAC lost a Star in the Fair Value section, earned and lost a Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 1 Stars. This rates BAC as a 1-Star Very Weak stock.
September is the month that BAC normally increases its dividend. The question is, what will they do? Increase, hold steady or drop? BAC has not earned its dividend for the past two quarters and has an above-peer dividend yield.
BAC is a proud company and I would be surprised to see a dividend cut based on their financials. Over the last four quarters cash has been between $35 and $40 billion. Short-term borrowings have inched up from $380 billion (06/2007) to $410 billion (03/2008). Operating cash flow has been negative for three of the last the four quarters, but cumulatively it is positive.
If BAC raises its dividend in September it would likely only be a token increase of 3% or less. More importantly, it will be a strong message about management's confidence in the future. I would likely add some shares just to lock in a 7+% dividend yield.
Like HD, BAC can hold its dividend flat until December 2009 and still show calendar year increases in 2008 and 2009. I see this as the most likely scenario. management can take a wait and see approach without damaging its dividend status. In this case, I would put BAC on the shelf until its future becomes a little more clear.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I owned shares of BAC (4.0% of my Income Portfolio).
What are your thoughts on BAC?
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D4L - I think the entire financial sector is so hard to read right now. I would love to jump all over BAC right now but am a little tentative just not knowing when things will get better for the sector.
D4L,
The payout on BAC is a little high for me. The yield is very good, but way above historical norms. Where will future dividend growth come from?
passivefamilyincome: I wouldn't touch BAC until its future is more clear. I would like to add more USB, but my allocation will not allow it at this time.
Dividend Growth Investor: There are too many wild cards for BAC now. I supect it will struggle for the next 12-18 months.
Best Wishes,
D4L
Any other banks that you would be buying now besides USB? I was eying WB actually, but the recent shake up scared me off.
Since I am over-weighted n the banking sector now, I haven't rerun the analyzes on the banks in some time. I recently sold WB in my IRA after they cut their dividend.
Best Wishes,
D4L