Bank of America's headquarters in Charlotte, North Carolina. Image source: iStock/Thinkstock.
If there were only three charts that an investor could look at to get up to speed on Bank of America's (BAC 1.39%) stock, here's what they'd be.
1. Valuation
The first thing an investor needs to know about Bank of America's stock is that it trades for the second lowest valuation multiple among the nation's biggest commercial banks, behind only Citigroup (C 1.82%). Investors can buy Bank of America's shares right now for a 29% discount to its tangible book value, whereas they'd have to pay an 82% premium to purchase shares of Wells Fargo (WFC 0.52%).
Data source: YCharts.com.
This implies that there's upside to Bank of America's shares based on valuation alone. While it will be a long time before its shares trade for a multiple equal to Wells Fargo's (if they ever do), it isn't unreasonable to think that they'll trade for more than its tangible net worth at some point in the not-so-distant future. This follows from the simple fact that Bank of America's earnings are improving and should continue to do so, as it puts more crisis-related issues in its rearview mirror with each passing quarter.
2. Stock performance
The second thing that an investor needs to know is that Bank of America is, to a certain extent, damaged goods. This is reflected in its stock chart dating back to before the financial crisis.
Data source: YCharts.com.
Over the past decade, Bank of America's shareholders have seen the value of their investment fall by 72%. This is better than Citigroup's stock, which is down by 92% over the same period. But it's meaningfully worse than the performance of both JPMorgan Chase and Wells Fargo, which have seen their shares increase by 44% and 53%, respectively, over the same period.
This matters because the same culture that led to this decline, which was fueled by imprudent lending and a lack of discipline with respect to acquisitions, should be assumed to still exist at Bank of America -- and, for that matter, at Citigroup as well. Consequently, while it seems reasonable to assume that shares of both of these banks will recover over the foreseeable future given their extremely low valuations, these aren't the types of bank stocks that long-term investors can add to their portfolios and simply forget about.
3. Capital allocation
The final thing that an investor needs to know about Bank of America is that it's likely to increase its dividend substantially in the quarters and years ahead. You can see this in the chart below, which illustrates how Bank of America allocated its capital in the first three quarters of 2015.
Data source: Bank of America.
The point here is that Bank of America retains a very large share of its earnings, as opposed to distributing the money to shareholders via dividends and stock buybacks. A bank like Wells Fargo, by contrast, seeks to allocate its earnings roughly evenly among dividends, stock buybacks, and retained earnings.
While this isn't a good sign for Bank of America, because it reflects a lack of confidence on the part of the Federal Reserve, which has veto power over capital plans at the nation's biggest banks, it nevertheless illustrates how much room Bank of America has to increase its dividend going forward.
This is particularly true given that the Charlotte, North Carolina-based bank's earnings have only recently begun to approach a normalized level. To this end, 2015 was the first time that Bank of America had strung together four consecutive calendar quarters of meaningful profits. It still has a lot of work to do on this front, given that its profitability is still roughly half that of Wells Fargo's, but 2015 nevertheless represented a tangible step in the right direction.
