Bank of America (BAC) is one of the biggest financial institutions worldwide, serving millions of individual consumers, businesses, and governments.
The company offers a wide range of financial services, including banking, investing, asset management, and risk management services.
Bank of America is currently the second-largest U.S. diversified bank in terms of market cap. Valued at $349 billion, it comes after only JPMorgan Chase & Co. (JPM). Banks are benefiting greatly from the ongoing excess supply of cash.
The monetary policy, and stimulus check frenzy, act as a great growth catalyst that keeps boosting its financials. Bank of America’s latest results clearly reflect this. I am bullish on the stock. (See BAC stock charts on TipRanks)
Cheap Interest Rates, Strong Profitability
The dead-cheap (and continuously declining) interest rate climate has caused investors in the banking industry to worry for years now.
Generally, a decline in interest rates leads to compressed lending margins for banks. Low rates tend to flatten the yield curve, which usually unfavorably impacts net interest incomes, echoing the fact that banks aim to borrow short-term, and lend long-term.
Bank of America and its peers have felt the agony of lower rates, and the company’s most recent quarter again reflected this. In Q2 2021, Bank of America’s net interest income declined 6% to 10.2 billion.
Still, the company managed to deliver a net income of $9.2 billion, the highest quarterly bottom line in its history. This was driven by robust growth in consumer deposits, which grew 21% to $979 billion, lower credit costs, a $3.7-billion improvement in provision for credit losses, and record consumer inflows in investment products.
Massive Buybacks to Boost EPS
Since suspending buybacks during the Great Financial Crisis, Bank of America has been gradually boosting repurchases, rewarding its shareholders richly.
In 2019, the company’s repurchases hit a record of around $28 billion. While management paused buybacks in the early stages of the pandemic to be prudent, it has started reaccelerating them. In Q2, buybacks amounted to $4.21 billion.
Considering the bank’s record profitability, buybacks could reasonably return to the $7-billion range per quarter. Assuming a reasonable return to $28 billion per year, the company would be buying back around 8.3% of its shares outstanding each year at its current market cap.
Hence, not only should EPS considerably benefit from buybacks, but along with the stock’s dividend yield, which currently hovers at around 1.9%, shareholders should enjoy a capital return yield north of 10%.
Bank of America is currently trading at 14 times its next 12-month net income, which should be a rather reasonable multiple.
Besides the excess supply of cash during these times, which should continue benefiting the company through more deposits and investor inflows, its aggressive buybacks should act as a strong EPS catalyst, as mentioned above.
Strong dividend increases ahead should also incentivize investors to keep buying the stock at its current levels, which should prevent a valuation compression. The company’s latest DPS hike was by an impressive 17%, after it successfully passed its stress tests.
Wall Street’s Take
Turning to Wall Street, Bank of America has a Moderate Buy consensus rating on the stock, based on six Buys, four Holds, and one Sell assigned in the past three months. At $42.32, the average BAC price target implies 7% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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