Is BAC’s 50% Dividend Hike Enough for It to Compete with Peers?



Bank of America’s dividend hike

Bank of America (BAC) hiked its dividend by 50% to $0.075 after it cleared the Federal Reserve’s 2016 stress tests in June 2016. It will also buy back stock worth $5 billion over the next 12 months. Bank of America failed three out of five earlier stress tests, performing the worst among the major US banks.

BAC’s dividend will be effective in 3Q16. Unlike many of its peers who have raised their dividends annually since 2011, Bank of America has boosted its quarterly payout only once, in 2014.

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The Federal Reserve’s approval is important for investors who have been disappointed by the bank’s low payout ratio. Bank of America has been under pressure to increase its dividend payout for some time now. Its banking peers (XLF) have already restored their dividends to pre-recession levels, but it has a long way to go.

Its current dividend of $0.075 is much lower than the level of $0.64 before the crisis. Bank of America’s payout ratio is expected to rise to 49% from 36%.

Over the next 12 months, Bank of America will return $8 billion in capital to its shareholders, including $3 billion in dividends. Such large-scale share repurchase plans reflect the company’s confidence in its current valuations as well as its long-term prospects. While the magnitude of Bank of America’s capital plan is at par with peers Wells Fargo (WFC), Citigroup (C), and JPMorgan Chase (JPM), its dividend yields remain significantly lower.

For 2Q16, BAC announced a dividend of $0.05 per share, flat on a quarterly basis as well as year-over-year. During the quarter, the company repurchased $1.4 billion worth of its common stock and paid $0.5 billion worth of dividends to his shareholders.


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