I'm far from Bank of America's (NYSE: BAC ) biggest fan when it comes to the megabank's stock. But I also won't deny that it's been presented with a phenomenal opportunity to prove naysayers like me wrong.
The North Carolina-based lender has come a long way over the past five years. It's slayed billions of dollars in legal claims. It's aggressively attacking its expense base. And by investing in new marketing campaigns, it's even chipping away at the reputational damage it suffered when the subprime mortgage bubble burst in the lead-up to the financial crisis.
With this progress in mind, I decided to outline three reasons that Bank of America's stock could continue to rise over the coming months and years.
1. Legal expenses have declined
I've claimed in the past that Bank of America's legal drama was largely over, only to be proved wrong by subsequent multibillion-dollar settlements. But this time is different -- click here for a complete list of the bank's judgments and settlements since 2008.
With the exception of one comparatively minor case that remains outstanding between the bank and mortgage-bond insurer Ambac Financial (NASDAQ: AMBC ) , the bank really does appear to be done atoning for its sins of the financial crisis -- and particularly its lamentable 2008 acquisition of Countrywide Financial.
Most recently, Bank of America reached a $16.65 billion settlement with the U.S. Justice Department and various federal and state agencies. It includes a $9.65 billion cash payment and approximately $7 billion worth of consumer relief, consisting of mortgage modifications, low- to moderate-income mortgage originations, and "community reinvestment and neighborhood stabilization efforts."
The total figure makes it Bank of America's biggest settlement stemming from the financial crisis, and thereby the biggest payout of any bank of any time. It also caps more than five years in which a substantial majority of the bank's earnings were used to extinguish legal claims.
With its net income now free to distribute to shareholders, it would surprise me if Bank of America's share price didn't respond by moving higher in the coming years.
2. Bank of America's valuation
Bank of America's stock is one of the least expensive bank stocks in the market today, thanks in large part to the drag on its earnings from legal judgments and settlement.
Measured by price-to-book value, which is the traditional metric used to assess the relative value of bank stocks, it trades for a 23% discount to book value. That makes it the cheapest bank stock among the nation's largest lenders:
Now, just to be clear, there are reasons Bank of America's stock is trading for such a steep discount. Namely, as I discussed at length here, its efficiency ratio is too high and its historical credit standards were too low.
But with a renewed appreciation for risk management and massive legal expenses now largely in the rearview mirror, it isn't unreasonable to assume that Bank of America will make strides on both of these fronts.
3. Dividends and share buybacks
Finally, Bank of America CEO Brian Moynihan has been clear from the outset that one of his biggest priorities is returning capital to shareholders.
"When B of A has built up a sufficient capital cushion, probably two to three years from now, Moynihan plans to return all earnings to investors in dividends or share buybacks," wrote Fortune's Shawn Tully after interviewing Moynihan in 2011.
Of course, that was before the litany of multibillion-dollar settlements hit the books. But now that those are essentially done with, the bank's chief now has the opportunity to follow through on his promise, which he recently began to do by spearheading a boost in Bank of America's quarterly dividend from $0.01 to $0.05 per share.
Assuming dividend increases and share buybacks continue to accumulate, in turn, it's hard to image a scenario in which the bank's stock won't respond in kind over the foreseeable future.
The bottom line on Bank of America
Of course, nothing is certain in the world of investing -- including Bank of America's ability to sufficiently clean up its operations and improve profitability. In fact, it's my opinion that Bank of America's stock isn't worthy of the risk for most individual investors.
Will I be proved wrong? I hope so. But the onus is on Bank of America to convince us.
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