Can Bank of America Boost Dividends in 2017?



Bank of America’s dividend growth

Bank of America (BAC) boosted its dividends 50.0% to ~$0.08 after it cleared the Fed’s 2016 stress tests in June 2016. It will also buy back stock worth $5.0 billion over the 12 months beginning in 3Q16. The bank has failed three of the last five stress tests, the worst among major US banks.

BAC’s dividend became effective from the third quarter. Unlike many of its peers (WFC) that have raised their dividends annually since 2011, Bank of America has boosted its quarterly payout only once, in 2014.

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Importance of the Fed’s approval

The Fed’s approval of banks is important for investors who have been disappointed with a bank’s (XLF) low payout ratio. Bank of America (BAC) 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 Bank of America has a long way to go. Its current dividend of ~$0.08 is much lower than $0.64 before the crisis. The bank’s payout ratio is expected to rise to 49.0% from 36.0%.

Over the next 12 months, Bank of America could return $8.0 billion in capital to shareholders, including $3.0 billion in dividends. Such large-scale share repurchase plans reflect the company’s confidence in its current valuations as well as long-term prospects. While the magnitude of Bank of America’s capital plan is at par with peers Citigroup (C) and JPMorgan Chase, its dividend yields are significantly lower.

Although Bank of America’s balance sheet is smaller than JPMorgan’s, it has $16.0 billion worth of shareholder equity. Despite that, it has boosted its dividend only twice since 2011, while JPMorgan has raised its dividend every year.

Bank of America’s CEO (chief executive officer) Brian Moynihan hopes president-elect Donald Trump will relax the Dodd-Frank Act so the bank can raise its dividends even more.


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