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BAC Banking on 50% Dividend Hike to Mitigate Concerns

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Bank of America raised dividends 50%

Bank of America (BAC) has raised its dividends 50%, to 7.5 cents, after it cleared the Fed’s 2016 stress tests. It will also buy back stock worth $5 billion over the next 12 months. The bank had failed three of the last five stress tests, the worst among major US banks.

This dividend will be effective as of the third quarter. Unlike many of its peers (XLF) 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 Fed’s approval is important for investors who have been disappointed with Bank of America’s low payout ratio. The bank has been under pressure to increase its dividend payout for some time. Its banking peers have already restored their dividends to pre-recession levels, but Bank of America has a long way to go. Its current dividend of $0.07 is much lower than $0.64 before the crisis. Its payout ratio is expected to rise to 49% from 36%.

Over the next 12 months, Bank of America should return $8 billion in capital to shareholders, including $3 billion in dividends. Such a large-scale share repurchase plan reflects 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 Citigroup (C) and JPMorgan (JPM), its dividend yields still remain significantly lower. Its dividend of 7.5 cents equates to a dividend yield of 1.9%, which is still lower than Wells Fargo’s (WFC) and JPMorgan’s. For 2Q16, Bank of America announced dividends of $0.05 per share, which is flat on a quarterly basis as well as a year-over-year basis.

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