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

Bank of America passed the stress test, but weakness remains

Mar 24, 2014 at 10:26AM

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
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Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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