Image source: Flickr user Mike Mozart.
Finding the right stock to buy can be quite the chore for investors when there are more than 7,000 publicly traded companies to choose from on U.S. stock exchanges. But investors also understand that finding a company with a solid business model can also propel their wealth to new heights over the long run.
A study conducted by J.P. Morgan Asset Management, using data from Lipper, between Dec. 31, 1993, and Dec. 31, 2013, found that holding onto the S&P 500 over this entire 20-year period without selling would have netted investors a 483% gain. Mind you, this period included two major bear markets that witnessed the S&P 500 plunge by more than 50%. Comparatively, the data also showed that missing just 10 of the top-performing days in this approximately 5,000-day trading period would have reduced your return to a mere 191%. Miss a little over 30 of the S&P 500's best days, and your gain disappeared completely. In sum, thinking long-term and finding great companies is the tried-and-true way to build inflation-topping wealth.
15 reasons to buy Bank of America and never sell
What companies should you consider? While the gambit is certainly not narrowed down to just one or two, one company that could cross your radar is money center giant Bank of America (BAC 1.59%). Having put the mortgage meltdown in the rearview mirror, here are 15 reasons you might consider adding Bank of America to your portfolio and never selling.
1. Brand recognition
Perhaps the easiest thing to like about Bank of America is its brand value and recognition. Sure, banks may not be the most likable industry, but a report released in 2011 from Brand Finance listed Bank of America as having the most valuable banking brand in the world. Brand recognition can go a long way to securing new clients and retaining existing customers.
2. Interest rate normalization
No one knows for certain where interest rates are going to head next, but history shows us that lending rates tend to historically run quite a few percentage points higher than where they are now. Higher lending rates can help boost net interest margin for banks (the difference between the average interest rate charged to customers they lend to and the interest rate banks pay on the money they borrow), and it's probably not unreasonable to think we'll head back to "normal" levels at some point in the future.
Image source: Bank of America.
3. GDP growth
Sometimes finding great stocks means playing the numbers game. For decades it wasn't uncommon to see U.S. GDP grow at a mid- to high-single-digit percentage. In today's economy, a 3% growth rate seems reasonable. In spite of the inevitable hiccups that occur during recessions, U.S. and global GDP is slated to march higher over the long term, which could more chances for banking giants like Bank of America to make an impact.
4. Well-capitalized
Bank of America has also come a long way since the Great Recession in terms of its capitalization. It ended the first quarter with $162.7 billion in Tier 1 common capital, which is nearly $23 billion higher than the threshold considered to be a well-capitalized bank. When another recession strikes, B of A should be prepared.
5. Loan and deposit growth
We're also seeing growth in the bread and butter of banking profits. Forget derivatives and other riskier growth prospects; Bank of America's most recent quarterly report showed deposit growth of $64.1 billion to $1.2 trillion and total loan growth of $28.4 billion to $901.1 billion. As long as both figures are ticking higher, B of A's core business can be perceived as healthy.
6. Improved loan portfolio mix
Bank of America has also worked on attempting to diversify and simplify its product offerings. As an example of this, the bank is increasing its loan exposure to businesses as a percentage of overall loans. By the end of 2009, about two-thirds of its loan portfolio was tied up with consumers (mainly in housing mortgages). By the end of Q1 2016, its loan portfolio was perfectly mixed 50%-50% between commercial and consumer clients.
7. Cost-cutting
Cutting costs and simplifying its product and service offerings is critical for B of A to maintain or grow its operating margin. For example, as of Q1 2016 it had reduced the number of home loan products from 136 to just 39, and checking accounts from 22 types to just three. After completing a reorganization in 2014 that cut $8 billion in expenses annually, B of A shaved more than $19 billion off in costs between 2011 and 2015.
Image source: Bank of America.
8. Long-term debt decline
Long-term debt is a drag that can keep a business's valuation from achieving its full potential. Thankfully, Bank of America has reduced its long-term debt from $523 billion by the end of 2009 to $233 billion as of the end of Q1 2016. This could even give B of A enough breathing room to consider growing inorganically.
9. Share repurchase program
One thing Bank of America and its board do believe in is rewarding long-term shareholders. Last year, Bank of America's board authorized a $4 billion share repurchase agreement. Just last month it authorized adding another $800 million to that total. Buying back shares can reduce the number of shares outstanding, boosting EPS and making a company's stock look more attractive in the process.
10. Payout ratio
Bank of America's dividend yield may not be much to look at right now (1.3% yield), but its payout ratio of just 15% (based on Wall Street's 2016 full-year EPS consensus) suggests that dividend expansion is likely in the future.
11. Litigation a distant memory
Since the housing bubble burst, and through the midpoint of 2014, Bank of America forked over $61.2 billion in settlement feels to the Justice Department according to The Huffington Post. This accounted for practically half of the $128 billion in total settlement collected by the Justice Department between 2009 and mid-2014. Today litigation expenses are nearly gone, meaning investors are getting a much clearer view of B of A's profit potential.
12. Management tenure
Great companies don't always have great managers, but it's a bonus in this case that Bank of America's leaders tend to stick around for a while. Since 2001 we've only seen two CEOs at the helm, with current CEO Brian Moynihan manning the reins since Ken Lewis stepped down in 2010. Having continuity at the top often means a business's long-term growth strategy stays on track.
Image source: Bank of America.
13. Product and service innovation
Just because B of A has simplified its products and services doesn't mean it's stopped innovating. It's catering to millennials with fingerprint and touch ID sign-in capabilities for select Android and iOS users of its banking app, and it's been courting enterprise clients with the introduction of its Bank of America Merrill Lynch Lockbox service in October for the digitization and processing and paper payments. Innovations like these (and many more) can help set B of A apart from its peers.
14. Institutional ownership
Although I'd never advocate blindly following money managers into a stock, you should know that 63% of Bank of America's shares are being held by institutional investors (more than 1,500 funds and institutions). This means quite a few perceived-to-be smart money managers believe Bank of America will be worth more in the future than it is now.
15. Valuation
Finally, Bank of America looks to be priced very attractively. On traditional fundamental metrics, it's trading at around nine times forward earnings and with a reasonable Price/Earnings to Growth ratio of around 1.5. More important, it's trading below its tangible book value ($16.17) as of the end of the first quarter. Most banks typically trade closer to 1.5-to-2 times their tangible book value to be deemed "fairly valued."
I'm already a four-year-plus owner of Bank of America stock and I simply see no reason to sell. What point stands out most to you? Share it in the comments below.
