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Will Bank of America’s Dividend Hike Attract Investors in 2016?

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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 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 (XLF). Its dividend will be effective from 3Q16 onward. Unlike many of its peers (WFC) 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 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 have already restored their dividends to pre-recession levels, but it still has a long way to go.

Bank of America’s current dividend of $0.08 is much lower than its dividend of $0.64 before the crisis. Its 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 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 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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