Bank of America Corp: The Next Big Driver for BAC Stock
Upside for BAC Stock?
Bank of America Corp (NYSE:BAC) stock is trading at a five-year high, up 24% over the past year.
The famous saying goes, “buy low and sell high.” Using this theory in regards to the price chart, BAC stock could be a dangerous stock to own right now. However, let me explain why BAC stock should be considered before making a judgement.
First off, Bank of America is not the only investment that has hit new highs recently. The Dow Jones Industrial Average (DJIA) and the price of oil have seen new all-time and near-term highs, respectively.
The reason for this is the anticipated future of the U.S. economy. Investors are making adjustments to their portfolios based on their future expectations. The rally of the markets began when Donald Trump won the election for the U.S. presidency.
One of Trump’s top priorities during the campaign was growing the U.S. economy. The president-elect wants the entire economy to grow, regardless of whether it’s with blue-collar or white-collar jobs. When economies grow, interest rate increases tend to occur. Currently, rates are sitting at historic lows of 0.25% to 0.50%, and they can only go higher.
With the economy growing, Bank of America is a large beneficiary. For starters, it will benefit from increased demand for its service. The company is already being proactive for when the economy does start growing. When the third-quarter earnings were released in October, the higher-margin businesses saw double-digit growth compared to the previous year. This included sales and trading from the global markets, as well as global banking for corporate clients.
Bank of America also stands to see larger margins with higher interest rates. Specifically, the increase will come in regards to net interest margins. The concept is pretty simple: money is loaned out to clients at a higher rate compared to what the person is earning and interest is paid on the loan. Meanwhile, on the other end, money is taken in by the bank and interest is paid out to clients. (Source: “Bank Of America Reports Third-Quarter 2016 Financial Results,” Bank Of America Corp, October 17, 2016.)
When interest rates do increase, the loan side of the portfolio sees a greater impact, which creates a larger net interest margin. Currently for BAC stock, the net interest margin is 3.47%, which should increase as interest rates do. (Source: “Net Interest Margin,” BankRegData.com, last accessed December 7, 2016.)
Shares are trading at $22.22 at present, which is below the book value per share of $24.19. For investors, this provides information about how much the entire business is worth if the company were to liquidate itself. Therefore, the current price is trading at a discount compared to the value of the assets of the business (book value per share). (Source: Bank Of America Corp, October 17, 2016, op cit.)
Even taking a look at the price-to-earnings (P/E) ratio, BAC stock is cheap compared to the S&P 500 index. BAC stock’s P/E ratio of 16.29, which is cheaper than the 25.60 of the S&P 500 index. This ratio provides details about how much is paid by investors per dollar of earnings; in Bank of America’s case, it is $16.29, compared to $25.69 for the S&P 500. BAC stock is trading at approximately a 36% discount based on a P/E ratio comparison.
Final Thoughts on BAC stock
BAC stock pays a quarterly dividend of $0.075, which has grown 650% over the past three years. The shares currently provide a dividend yield of 1.35%, and they are trading at $22.22.
With the future of the U.S. economy looking bright, Bank of America Corp should be considered. Based on the fundamentals, BAC stock is reasonable when looking at the valuation even those the share price has been moving higher.