Bank of America (BAC) is among the biggest financial institutions across the globe, serving millions of individual consumers, businesses, and governments. It offers its client base a broad spectrum of financial services, including banking, investing, asset management, and risk management services.
The company is currently the second-largest U.S. diversified bank based on its market cap. Valued at ~$330 billion, Bank of America comes after only JPMorgan Chase & Co. (JPM), which is valued at over $380 billion. Banks like Bank of America are profiting greatly from the continuing excess supply of cash.
Last year’s monetary policy and stimulus check frenzy proved a great growth catalyst that continued to boost the company’s financials. Bank of America’s most recent results clearly reflected this. I remain bullish on the stock.
Strong Financials
The ultra-cheap interest rate climate has resulted in investors in the banking industry worrying for quite some time now.
Typically, a decline in interest rates results in tight lending margins for banks. Low rates are likely to flatten the yield curve, which generally impacts net interest incomes negatively, mirroring the fact that banks aim to borrow short term and lend long term.
The FED is likely to increase rates very soon, which could change the current landscape. Regardless, the company’s performance remained robust even with the current ultra-low rates. In Q4 2021, Bank of America’s net interest income grew 11% to $11.4 billion.
The company delivered a net income of $3.1 billion in its Consumer Banking segment, driven by a continued boost in consumer deposits, which grew 16% to $1 trillion, and record consumer investments assets, which grew 20% to $396 billion. Total net income came in at $32 billion, with EPS of $3.57.
Massive Buybacks to Boost EPS
In 2019, Bank of America’s stock repurchases hit a record of about $28 billion. Management paused buybacks in the midst of the pandemic to conserve liquidity.
However, buybacks have not only resumed, but their pace is also accelerating. In Q4, buybacks amounted to $7.53 billion. For the full year, they were $25.1 billion. At the current run rate, we should see 2019’s record levels broken this year.
At a rate close to $7.5 billion per quarter, buybacks could approach close to $30 billion this year. This suggests that the company could be buying back about 9% of its shares outstanding this year near the stock’s current price levels.
Accordingly, not only should EPS greatly benefit from buybacks, but combined with the stock’s 2.1% dividend yield, shareholders should be subject to an investor (aggregate) yield north of 10%.
Valuation
Bank of America is currently trading close to 12.5 times its next year’s projected net income, which in my view, is a rather fitting multiple.
Excluding the excess supply of cash these days, which should continue aiding the company through increased deposits and investor inflows, its aggressive buybacks should be a strong be a contributor to EPS growth, as mentioned earlier.
Above-average dividend hikes ahead should also motivate investors to accumulate shares at their current levels, which should discourage additional valuation compression. The company’s latest dividend hike was by a satisfactory 16.7%, following the company successfully passing its stress tests.
Wall Street’s Take
Turning to Wall Street, Bank of America has a Moderate Buy consensus based on 11 Buys, six Holds, and one Sell assigned in the past three months. At $51.91, the average Bank of America price target implies 26.2% upside potential.
Conclusion
Bank of America is a quality company in the industry that has managed to deliver relatively robust profitability even during the ongoing low-rate environment.
The stock remains attractive from a valuation/capital return perspective, with investors likely to enjoy a combined capital return yield in the double digits this year. Along with the fact that I find Bank of American rather reasonably valued at its current levels, I remain bullish on the stock.
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