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Bank of America May Be Able to Raise Its Dividend – But Should It?

Source: Flickr / winnifredxoxo.

The results of the annual Comprehensive Capital Analysis and Review of the nation's largest financial entities are out, and Bank of America Corp. (NYSE: BAC  ) has passed – prompting a rise to nearly $18 per share in heavy trading activity immediately after the announcement.

Great news, certainly. The truth is, though, that it wasn't a robust win; B of A trailed its peers, and its 5.9% Tier 1 common ratio following a "severely adverse scenario" lagged the results of JPMorgan Chase at 6.3%, Citigroup, at 7%, and Wells Fargo at 8.2%.

Bank of America would have incurred the biggest loss, $49.1 billion, of any of its peers, as well. Runner-up Citigroup was next, with projected losses of $45.7 billion.

The big question
Investors, naturally, are hoping for a dividend hike from Bank of America this year. So far, though, B of A isn't letting on whether it will request a dividend increase for this year, and analysts seem unsure, as well.

In a recent Dividends Research Report, Markit predicted that Bank of America might bump up its dividend fourfold, to $0.05 per share from the current $0.01. Even with that increase, the firm noted that B of A would still be far behind most of its peers in the yield department except Citigroup. Probably, the memo concludes, the bank would "emphasize share repurchases".

Buildup versus a payout?
As fellow Fool John Maxfield noted recently, buybacks are looking as if they might be CEO Brian Moynihan's choice. As he points out, share repurchases are limited endeavors, whereas dividend payouts generally are not. With stressed capital levels inclusive of any capital return plans, it makes more sense to lean toward buybacks. With its Tier 1 levels coming in fairly low – and losses predicted to be high – repurchases seem the smarter move for Bank of America this year.

Will investors be disappointed if Bank of America does not pump up its dividend? Perhaps. But longtime shareholders would doubtless rather see the bank get stronger, even if that means deferring cash payouts for another year.

As an analyst from Atlantic Equities pointed out, B of A's implied cash cushion of $13 billion may not be enough to convince the Fed to allow an increased dividend payment, anyway. Considering how far the bank has come since the dark days of the financial crisis, waiting one more year for a dividend boost shouldn't be too onerous.

Banking on the future
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2014, at 11:22 AM, skyisfalling wrote:

    what would make financial more possible, it is would more possible for ordinary investors like me. Stock buy would cost be the bank over time and have the directors more control and looked by the Analysts. One the bank start the dividend the over by all Analysts.

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Amanda Alix

Foolish financial writer since early 2012, striving to demystify the intriguing field of finance -- which, contrary to popular opinion, is truly what makes the world go 'round.

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9/4/2015 4:01 PM
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