Like AIG, Bank of America Corp (NYSE:BAC) received federal funds during the dark days of the financial crisis (and to be fair the funds were repaid with a profit for the government), but Bank of America Corp (NYSE:BAC)’s questionably ethical actions are still surfacing on almost a monthly basis. The latest allegations against Bank of America Corp (NYSE:BAC) as reported by its hometown paper, the Charlotte Observer, allege the bank rewarded mortgage workers with bonuses and gift cards for meeting foreclosure quotas. Combined with the actions of Countrywide, which has since become part of Bank of America Corp (NYSE:BAC), the bank is now seen as among the least ethical companies on Wall Street.
When Bank of America Corp (NYSE:BAC) bought Countrywide it got a nationwide home loan network. Unfortunately for BofA, however, this nationwide home loan network had a multi-billion dollar lawsuit target pinned on its back. BofA is still battling the lawsuits associated with mortgages gone bad including a proposed $8.5 billion settlement still being fought over in court (a payment of $8.5 billion by BofA being a positive outcome; if the settlement is rejected by the court some analysts have said the total cost to BofA could rise as high as $60 billion). The bank’s earnings have frequently been affected by legal settlements causing results to be less than stellar since the financial crisis. But BofA still has significant earnings power with future earnings estimates calling for earnings in the $1.50 per share range before any legal settlements. For BofA, if it can effectively manage its legal troubles, shareholders could see significant upside from a rise in earnings and the bank’s current discount to book value.
An oily mess causes a financial mess
In 2010, BP plc (ADR) (NYSE:BP) grabbed public attention, but not in the way it wanted. After the Deepwater Horizon rig caught fire and sank into the Gulf of Mexico it unleashed an ongoing PR disaster for BP plc (ADR) (NYSE:BP). During the incident, eleven men were killed and the resulting oil leak caused environmental damage both to the Gulf itself and the land around the Gulf. Comments by the then-CEO of BP plc (ADR) (NYSE:BP) did not help the situation, and resulting investigations found lapses on BP plc (ADR) (NYSE:BP)’s part were at least partially responsible for the resulting leak. As a result, billions in funds were set aside to pay out damages, with total damages remaining uncapped.
When anyone considers whether to invest in BP plc (ADR) (NYSE:BP) they must keep the legal risks in mind. Like BofA, BP plc (ADR) (NYSE:BP) has significant earnings power but legal settlements threaten to take a big bite out of future earnings. The market clearly assigns more risk to BP shares than those of other mega-cap oil companies, giving BP shares a dividend yield of over five percent and a P/E ratio among the lowest in the industry. Claims can still be filed, and both the number of claims and how they play out will play a critical role in whether BP is a bargain or a money pit.
Questions remain
All three of these companies have events that will play out over the next several years that will be critical to their future. While AIG will need to manage its possible sale of ILFC, BofA and BP will be fighting multi-billion dollar legal battles over the next few years. But investing is about increasing returns, and if investors can accept the risks associated with these companies they may want to consider investing in them, even if they’re at odds with their ethical practices.
Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends American International Group and Bank of America. The Motley Fool owns shares of American International Group and Bank of America and has the following options: Long Jan 2014 $25 Calls on American International Group. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is it Time to Buy These Hated Brand Names? originally appeared on Fool.com is written by Alexander MacLennan.
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