BAC Turning a Corner as a Dividend Growth Stock…

Bank of America is a leading global financial organization providing wealth management, corporate and investment banking and trading services.

Bank of America has a presence in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico and more than 35 countries throughout Europe, the Middle East and Africa, Asia Pacific and the Americas. It caters to more than 80% of the U.S. population with its extensive retail branch footprint and serves approximately 66 million consumer and small business clients. The bank also serves corporations, governments, institutions and individuals around the world.

Bank of America provides a diversified range of banking and nonbank financial services and products through four business segments – Consumer Banking, Global Wealth and Investment Management, Global Banking, and Global Markets. It provides investment management, brokerage, banking, trust and retirement products. Bank of America is a leading commercial lender with nearly $500 billion in commercial loans and leases at the end of 2018.

The bank operates eight business lines and has more than 4300 centers, 16,300 ATMs, and 36 leading digital banking platforms.

Investment Data

Revenue Growth & Market Exposure

Bank of America has a huge global presence. It serves more than one in three U.S. households and over 9 million business owners. Its global banking business works with almost every company in the S&P 500. The bank is also strengthening its core ATMs, financial centers, branches and call centers network. It expanded its financial center presence in 25 new markets last year. In addition, the bank is targeting to redesign more than 2,500 financial centers by 2021.

Bank of America witnessed strong growth in all of its businesses during the last year. Its deposits have grown 4% and loans across all the business segments have also grown 6% on average, over the last four years.

The bank has invested roughly $25 billion in new technology initiatives since 2010. Today, Bank of America processes more deposit transactions through mobile devices than in its financial centers. Its relentless investment in technology has led to remarkable growth across its digital and mobile channels. Bank of America has also experienced increased customer activity since it launched its virtual banking assistant, Erica and Zelle, its peer-to-peer transfer partner in the recent past. It has nearly 37 million digital banking users out of which 27 million are active mobile banking customers. These digital investments have resulted not only in improved customer experiences but also in reduced branch count (reduced by more than 1,300 since 2012).

Bank of America is one of the most efficient firms in the industry, with an efficiency ratio of 58.5% for 2018. It has achieved a $30 billion reduction in its expense base since 2010 given its prudent expense management program.

Dividends

Bank of America is a dividend starter with 5 years of dividend increases. Its annual average yield stands at 2% with a very low payout ratio of 22%. The bank has returned nearly $26 billion to its shareholders, including more than $5 billion in dividends and more than $20 billion in share repurchases last year. The bank last raised its dividend by 25%. It has compounded its dividend growth at 39% per annum over the last three years.

After the stress test results were announced by the Federal Reserve, Bank of America revealed its capital plan which included share buyback of up to $30.9 billion over the next year. The bank is also targeting to return $37 billion to shareholders over the coming year.

Bank of America’s earnings has also grown at an impressive double-digit pace (22% CAGR) over the last five years. The bank’s focus on eliminating its risky businesses and strengthening its balance sheet has started to bear fruits. Its CET1 ratio has also improved to above the minimum regulatory standards, from just 7.6% back in 2010. Bank of America ranked amongst the world’s three most valuable financial services companies (by market capitalization value) in 2018.

Competition

U.S. banking is highly competitive. Bank of America faces significant competition in the rapidly evolving financial services industry. Being one of the largest in the industry, Bank of America has several cost advantages. JPMorgan Chase, Citigroup Inc., and Wells Fargo are its leading competition. Bank of America also competes with other large banks like Industrial and Commercial Bank of China and China Construction Bank. However, Bank of America’s earnings was the most among all U.S. global banks in 2018.

Bottom Line

Bank of America is well positioned to face evolving customer preferences, emerging technologies, and new risks. It was one of the world’s top 10 most profitable companies in 2018. The bank continually invests in new technology, infrastructure, cybersecurity and risk management. It has shown tremendous strength in turning around, given its cost cutting and impactful digital initiatives. An integrated digital platform and increasing digital user base should also attract new customers. Large scale, distribution and ATM networks, and a growing digital presence are its huge competitive advantages. A low payout ratio also indicates significant room for future dividend growth.

As a dividend growth investor, the big question is if you get on board now or wait for more dividend increases? The bank has definitely turned a corner and while it may feel like you are late to the party, what you want is consistency in growth and revenue and it looks like BAC has a plan to do that. How will you let history impact your decision?

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