These Big Banks Are Paying Huge Yields: Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM), Goldman Sachs Group, Inc. (GS)

Dividends vs. Buy Backs

When a stock is undervalued, buybacks are a better idea than dividends, since a repurchase means the company is not only returning cash to investors, but also investing its money in an attractively valued asset: its own shares.

This is particularly the case for Bank of America Corp (NYSE:BAC) which is trading at the lowest price to book value (P/BV) ratio in the group below 0.6. Goldman Sachs Group, Inc. (NYSE:GS) is not as undervalued as Bank of America, but it’s planning to implement a juicy buyback program which comprises 7% of its shares outstanding over the next year.

If the sector continues recovering and these stocks keep rising over the next years, this decision to put buybacks before dividends will turn out to be a smart move by management and a positive decision in terms of capital allocation. Under these scenario investors in Bank of America Corp (NYSE:BAC) and Goldman Sachs will be handsomely rewarded by the buybacks implemented at low valuations.

Wells Fargo is more on the dividend side, but that is understandable since the stock is not as cheap as the rest of the group with a P/BV ratio of 1.26. When it comes to JPMorgan Chase & Co. (NYSE:JPM), the bank is trading at a similar valuation to that Goldman Sachs Group, Inc. (NYSE:GS) in the area of 0.92, but Jamie Dimon has decided to split its capital distribution policy almost evenly between dividends and buybacks. Wells and JP Morgan are prioritizing the safety of dividends over buybacks, choosing a bird in hand over two in the bush.

Bottom Line

Many big American banks are offering big juicy yields, but you won´t discover that by looking only at dividends, a more comprehensive approach to total yield including both dividends and buybacks is required. Especially in cases like Bank of America Corp (NYSE:BAC) and Goldman Sachs, where the stocks are cheaply valued and buybacks are a big component of total yield; this may actually be best way to go when it comes to maximizing overall long term returns for investors.

The article These Big Banks Are Paying Huge Yields originally appeared on Fool.com and is written by Andrés Cardenal.

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