Bank of America Corp: Why is Donald Trump Good for BAC Stock?
BAC Stock: Great Potential for a Dividend Hike Ahead?
Banking stocks are on fire since Donald Trump won the U.S. presidential election in a stunning contest. For income investors, the question becomes which banking stock they should pick if they believe in Trump-related growth. Well, for me, Bank of America Corp (NYSE:BAC) stock is one of my favorites.
Before I discuss the growth potential of BAC stock in this changing economic scenario, let’s first see why investors have suddenly become so eager to buy banking stocks, which they had dumped in a no-go area before the Trump victory.
There are two main reasons behind the momentum we’re seeing in banks, including Bank of America.
First, investors on the street are hoping that Trump’s presidency will ease the regulatory burden on financial institutions, which could lead to a reduced compliance cost. During his presidential campaign, Trump has said many times that he wants to do away with the Dodd–Frank Wall Street Reform and Consumer Protection Act, which is the main legislation that enforces strict compliance rules on banks. (Source: “Donald Trump Says He Would Dismantle Dodd-Frank Wall Street Regulation,” Forbes, May 18, 2016.)
The second drive of increased demand for banking stocks is that investors now believe that Trump’s initial term will be good for economic growth and spending. People turned bullish on banking stocks, hoping that Trump’s economic policies, including infrastructure spending and tax cuts, will boost inflation and force the central bank to increase interest rates faster than it had previously planned.
And here is how this will help improve the outlook for BAC stock. Bank of America’s profit margins improve as interest rates go up, because then it can earn a wider spread on its loans to customers and earn more on its cash reserves.
This is a great development for dividend investors in BAC stock, as Bank of America’s income is very sensitive to any changes in interest rates. In fact, the bank will likely see an approximate $6.0-billion jump in its net interest income if the Federal Reserve hikes interest rates by 100 basis points. The net interest income comprises 50% of the company’s total income, making it one of the largest sources of the bank’s revenues. (Source: “How Sensitive to Interest Rates Has Bank of America Really Become?,” Market Realist, June 7, 2016.)
This sensitivity in the interest rates movement in the economy has made BAC stock one of the top beneficiaries of the post-Trump rally. BAC stock has climbed about 22% in the past month, outperforming many peers in the same period, including JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), and Wells Fargo & Co (NYSE:WFC).
Looking at Bank of America’s 1.5% dividend yield, the stock doesn’t seem to offer a return too temping for many dividend investors. But this dividend payout has grown fast over the past three years. Based on the current price of $19.94, BAC stock investors are getting a $0.075-per-share quarterly dividend, which is over-six-times higher than what the bank paid three years ago. (Source: “Bank of America to Increase Quarterly Common Stock Dividend by 50 Percent to $0.075 per Share; Authorizes $5 Billion Common Stock Repurchase Plan,” Bank of America Corp, June 29, 2016.)
Final Thought on BAC Stock
On the other hand, Bank of America is also undertaking a $5.0-billion share buyback plan, which is another positive factor for investors. Share buybacks reduce the number of shares outstanding and increase the profitability of existing shareholders.
I think this may be a good time for income investors to get excited about BAC stock and participate in its growth potential. Even without the Trump factor, the indications from the U.S. central bank are very clear on the interest rate direction. We’re likely going to see a slow and gradual rise in the cost of borrowing going forward, and this is a net positive for Bank of America stock.