Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Bank of America has a Dividend Growth Score of 44, indicating potential for solid dividend growth going forward, but also serving as a reminder that the banking industry can be extremely volatile and even the safest banks can sometimes have to cut their dividends.
For example, while Bank of America’s immense improvements to its business model, balance sheet safety, and profitability over the past six years have resulted in impressive dividend growth, including its most recent 50% payout hike, the fact is that we still don’t know how the bank will fare when the next economic downturn hits.
That’s not to say that a recession is necessarily imminent. In fact, based on the most recent economic data, the Atlanta Federal Reserve’s GDPNow model is forecasting brisk 3.6% Q3 economic growth.
If this model proves accurate and U.S. economic growth does improve in the coming quarters, then the Federal Reserve will likely raise interest rates. Which combined with the already strong increase in long-term rates (as represented by rising 10 and 30 year US Treasury rates), could spell a bonanza for Bank Of America.
After all, of all the big U.S. banks it’s most set to profit from even minor increases in rates. For example, if interest rates rise by just 1%, Bank of America projects that its annual profit would soar by almost $7.5 billion.
Or to put it another way, if the Federal Reserve’s long-term forecast for interest rates is correct (2.5% increase by 2020), Bank of America is poised to potentially see its annual profits soar by $18.7 billion; a 118% increase compared to 2015. And that’s just assuming the bank’s current assets stay the same. In reality, a scenario in which interest rates rise steadily for years would likely mean strong economic growth that would see the bank’s assets grow substantially as well.
Since the bank has been aggressively buying back shares and plans to only accelerate share reductions going forward, the growth in EPS would be even more impressive. Which in turn could theoretically drive the payout ratio to even low levels based on today’s dividend and allow for some of the best dividend growth in corporate America over the next five years, potentially along the order of 15% to 20% per year.
Of course, this all assumes that the economy continues to recover and interest rates continue to rise. Since no one can accurately predict either factor, Bank of America’s potential to become of America’s best dividend growth stocks remains highly speculative.
Valuation
When it comes to bank valuations, price to tangible book value (i.e. “liquidation value”) is the gold standard metric to use. That’s because this compares the current valuation to the objective intrinsic value of the bank, and by comparing this metric to its historic norm, as well as those of its peers, we can get a sense for the quality of the bank itself.
| Bank | Price/Tangible Book Value | 13-year Median P/TBV | % Of Global Banks With Lower P/TBV |
| Bank Of America | 1.19 | 2.59 | 51% |
| Citigroup | 0.86 | 2.98 | 70% |
| JPMorgan Chase | 1.59 | 2.19 | 32% |
| Wells Fargo | 1.90 | 3.92 | 23% |
Source: Gurufocus
For example, Wells Fargo and JPMorgan Chase have by far the best long-term track records of consistent profits and long-term shareholder value creation. Not surprisingly we find them trading at substantial premiums to Bank of America and Citigroup Inc (NYSE:C), which avoided bankruptcy only with substantial government help and massive dilutionary recapitalization.
Of course, since the election all financial stocks have benefited from a sharp rise in long-term interest rates. However, as you can see from the median P/TBV of these banks, they still trade at substantial discounts to their long-term median multiples.
In other words, as far as Bank of America is concerned, it’s not yet up to the quality standards of JPMorgan Chase or Wells Fargo, but it is making solid improvements and could represent an interesting investment opportunity, even despite the stock’s recent 19% rally since November 8th.
