Many readers have asked that I show the Dividend Valuation Model for Bank of America. The company recently announced disappointing earnings and has seen it price fall off with the other big banks.
Having said this, I believe the bank is dealing with its issues in investment banking and will be one of the first big banks to get its writedowns behind it.
The current dividend yield is 5.5%. BAC has raised it dividend in each of the last 20 years. Dividend growth, during that time, has averaged nearly 13%, and nearly 15% over the last 5 years.
The past is no guarantee of the future, but I believe the company will continue to increase dividends, albeit at a slower pace.
Wall Street analysts are now estimating that BAC's earning over the next 3-5 years will average near 8%. The chart above uses 8% dividend growth in 2008.
The green candy cane at the far right of the chart is the implied value of BAC at this 8% dividend growth rate. That price is $56 per share.
No one knows the magnitude of the subprime loan problems that lurk in bowels of banks today, but we can make some simple observations. Unless the US economy falls off a cliff, the banks have enough capital to withstand a lot more trouble that the subprime problems appear to present. BAC's management has a reputation for being straight talkers. They did not sugar coat their writeoffs, and CEO Lewis said the performance was unacceptable and that changes were coming in the investment banking group.
By the swiftness of the subsequent actions, the plans must have already been underway on the day of the earnings announcement, because three weeks later they have already replaced many of the top managers of investment banking, and announced the elimination of 3,000 jobs.
Including dividends, if BAC reaches $56 per share over the next 12 months, that will represent nearly a 29% total return.
I admit that it doesn't seem possible in light of the news of the day, but, as I said earlier, if Fed does its job and the economy has even modest growth, the subprime fiasco will gradually fade from the headlines, which will allow the banks to move higher.
I own BAC and have for many years. At 5.5% dividend yield, it doesn't take much price appreciation to make a double digit return. That might look pretty good a year from now.
If you are not a client of DCM, please do not act on my discussion here alone. Consult your own financial advisor.
Tuesday, November 06, 2007
Bank of America: Dividend Growth Will Continue and the Price Looks Right
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7 comments:
For some reason the graphic isn't appearing. I tried IE and Firefox. Can you try posting it again? I'd love to see the graph.
Obviously I am heeding your advice on not making financial decisions based on your discussion alone, because I added to my BAC position yesterday. 8-) Mind you, I hope nobody makes any decisions based on my posting because I'm not qualified to give financial advice!
I was looking at a couple of other stocks, but I think BAC is a good one and the dividend was just too good to pass up. I thought about C, and I'm sure lots of people will make money on it, but I've already learned my lesson once about avoiding a falling knife on Nortel (and it only cost me 10% of my retirement savings). My musings about C ended up being a good chance to talk to my kids at the supper table about value stocks vs cheap stocks.
Unfortunately I started accumulating BAC when the CDN$ was about 25 below where it is now, but the current exchange rate really helps, and sometime in the next 20 years (before I retire) the CDN$ will likely go down.
Regards,
Shawn
The BAC and other financial stock prices are saying that it si the end of the world for BAC ...unlikely so just pick up cheap and get almost 6% Dividend.
I don't think anyone should ignore the L3 assets that BAC and other large majors will continue to write-down. Their marks and the market's marks look to be in completely different ranges. This will continue to drain capital and have drastic impacts on ROE.
I know Lewis is closing down the I-bank, but these assets won't just evaporate.
Single name bank equities will likely struggle for the next few quarters. And what good is a 6% dividend yield, if the cost of ownership is double or triple that level?
Negative talk aside, when things do clear up, however, there won't be a more attractive place than high single-digit yielding dividend payers with earnings yields in excess of 10%.
I'm staying away for 2-3 quarters....and it's just a shot in the dark at timeframe...but this is one party I don't want to be early to.
Take care,
David G.
While I agree that substantial risks still exist for the banking sector, I also feel it is impossible to know where the bottom will be. As a long term investor, I have been buying into WFC and BAC a little bit at a time. In 3 to 5 years, I feel reasonably confidant that the investment will be very worthwhile. The risk reward is pretty attractive at this point. Furthermore, the good banks are going to come out much stronger than the undisciplined ones that took large risks. In the current climate, lots of good banks with real but manageable risks are getting slammed hard because of Citibank.
To all commentators, thank you. This is a very difficult time for bank stocks in the US and your input has been valuable in trying to figure out how bad the crisis is. I guess we can say, now, that it is worse than we thought. But is it worse than the banks can handle. My quick appraisal of the net capital of the big banks says they can make it through this.
It is easy enough to have a blog today so no one should be proud about seeing his or her name or nom de plume on an obscure blog like this one.
In this regard, I thank you for your comments because they are helpful to me and add to all of our readers' understandings of what is going on.
I can answer each of your questions, but that presupposes that I have answers that are worth your time.
I can write the most frightening train of events your have ever considered. I can make it convincing, I can use data that is indisputable, I can take to extreme every price or trend that has some length to it.
I am not alone it this. Indeed, many writers are doing just that in a convincing way, but they forget that God is still in control of events. Without a loving God, every trend leads to the rocks. Because we have a loving God, trends change, turn, rebound, double back on themselves.
In short, the "invisible hand of God" will soon intercede to make a turn.
How do I know this? Because I have seen the shadow of the invisible hand so many times before.
Greg,
Well written analysis, and very nice response to comments. A world without hope is a very dark place. The wonderful thing about the U.S. economy is that, by in large, we are still a country of optimism, hope, innovation, and faith. Our freedom to think is still unsurpassed. However, all of this is probably separate from analysis of the banking sector.
The banking sector is one that has been blessed with a multi-decade expansion due to deregulation, the demise of inflation, and the democratization of credit. Frankly, there is nothing wrong with sub-prime lending, per se. The problem was the greed and lack of oversight. Sub-prime opened the American dream to a segment that in past generations would be permanent renters. Participation in the dream is what America is about and why people over run our borders for the opportunity, legal or not. Hope and capitalism is very difficult to contain.
This very friendly cycle for banks is now over. The excess of only the last 12-18 months was enough to precipitate the next part of the cycle. I recall a Davis Funds wholesaler coming into our local office in the summer of 2006 (a rare visit by the Davis group). The hubris I sensed when I questioned the New York Venture Funds heavy exposure to financial left me with a flashback to the 90's when wholesalers would brag about how much tech was in the portfolio. It may have been an early warning, but it was accurate within 6 months.
So, I am still negative about financials, but I don't know for how much longer. I don't think banks have truly recognized the depth of the problem. They may not even have time to do so before others rescue them. With the drops in value and the dollar getting cheaper relative to almost every well know currency, the likelihood of a foreign buyer stepping it is increasing daily. Should that not transpire, one has to believe that the Fed simply will not let the moneycenters fail for the shear chilling effect it would have on the economy. However, Bernanke really seems to not have a good grasp of his role and actions needed. That scares me. Treasuries are loudly broadcasting that the Fed is off the reservation and not "getting it". At least not yet.
Remember, that with the S&L crisis there were actual failures. Remember, that in that crisis, there were more than one moneycenters that were insolvent, if only by strict definition. Clearly, we are not there yet. I hope it doesn't have to get that far as the size and complexity of financial institutions dwarf the institutions of that time.
A lot of this getting through this will be perception. Right now, I feel as though the Fed is on its' heels, and I won't feel comfortable until it feels as though it is on its' toes.
The value investor in me says you have to buy while no one wanted 'em. The technician in me says we're too early and there are too many trying to call the bottom in the banks, The risk manager in me abhors investing in things I do not fully grasp, so the level 3 investments give me great pause. The risk manager in me causes me to avoid leverage and the average bank is currently leverages 20:1 or more. The vulture in me says to wait until one cuts the dividend, or fails.
Guess that is how I see it, and it isn't an easy look.
Well, it is $21.46 now and sinking every day....
So much of your theory.
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