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Will BAC’s Dividend Hike Woo Investors in 3Q16?

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BAC’s 50% dividend hike

Bank of America (BAC) boosted its dividend by 50% to $0.08 after it cleared the Federal Reserve’s 2016 stress tests in June. It will also buy back stock worth $5 billion over the next 12 months.

Bank of America has failed three out of five earlier stress tests, giving the worst performance among the major US banks. Its dividend will be effective from 3Q16 onward. 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 Fed’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 BAC has a long way to go.

The company’s current dividend of $0.08 is much lower than its level of $0.64 before the financial crisis. Bank of America’s payout ratio is expected to rise to 49% from 36%.

Capital returns

Over the next 12 months, Bank of America expects to return $8 billion in capital to its 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 in its long-term prospects.

While the magnitude of BAC’s capital plan is at par with those of its peers Wells Fargo (WFC), Citigroup (C), and JPMorgan Chase (JPM), its dividend yields remain significantly lower.

In 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 its shareholders.

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