Dividend Growth Investors Should Not Ignore Bank of America Corp
February 10, 2017
BAC Stock: A Dividend Growth Stock
Bank of America Corp (NYSE:BAC) stock may be a stock that dividend growth investors should take a look at.
For such investors, the expectation is that their current dividends are safe and that the payment will grow. With more time spent in the investment, the yield on cost will only increase.
Since 2014, the dividend for BAC stock has increased 650%. Can the dividend continue to see future growth?
There are a few ways to determine if it can, the first being via the bank’s loan loss provision. This is money set aside by the Bank of America for any future liabilities, such as defaulted loans or credit products. Over the past five years, this money has been cut by more than half.
With less money set aside, it means there is more money available for dividend increases. Also, with less future liabilities of defaulted loans or credit products, the balance sheet should benefit, because it means customers are paying these outstanding balances.
The timing of this could not be more perfect, because the U.S. economy is slowly picking up steam. Gross domestic product (GDP), which provides insight on the total value of goods and services that are provided within the U.S., has improved over the last few years. This has resulted in greater consumer spending due to increased confident in the economy. (Source: “United States GDP Growth Rate,” Trading Economics, last accessed February 9, 2017.)
This has opened the eyes of the U.S. Federal Reserve, which has increased the benchmark to 0.75% and engaged in two rate hikes over the past 14 months. This benefits Bank of America’s bottom line because its net interest margin improves with each rate hike. Net interest margins are a bank metric, calculated by taking the difference of the interest rates on an outstanding loan and paid on savings accounts. The Fed has said there is a possibility of three more interest rate increases in 2017, which would only improve the net interest margins further. (Source: “Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017,” The Wall Street Journal, December 15, 2016.)
Another reason to see a dividend hike would be because of the conservative payout ratio, which is currently 11% for BAC stock. This represents the percentage of earnings that is paid out via the dividend payment. It allows for an increase in the dividend without affecting the financial situation of the company.
Valuation
BAC stock is currently trading at a price-to-earnings ratio of 15.5 times, while the S&P 500 index is a much lower 25.8 times. This ratio is calculated by taking the current price and dividing it by the earnings. Based on this comparison, BAC stock is trading at a discount.
As the positive catalysts for BAC stock become reality, the earnings should see a boost, resulting in the share price being bid higher. This could get BAC stock trading at a higher P/E ratio, one which is more in line with the S&P 500.
Another possibility is that, as the dividend increases, investors come to realize that BAC stock is trading at a discount.
Final Thoughts on BAC Stock
When researching an investment’s possible dividend growth, you should consider three things: the past, present, and future.
In the past, dividend growth investors have seen payout increases, which provides evidence of a desire to reward investors.
At present, the current valuation and P/E ratio make it a valid investment.
As for the future, there is reason to believe dividend growth is possible, if not probable. This positive outlook stems from less money being used on defaulted loans and credit products, as well as the rising interest rate environment.
BAC stock is currently trading at $22.71. The dividend yield at present is 1.32%.
