The Best Blue Chip for 2007: Bank of America

"A check is like a note from your mother that says 'I don't have any money, but if you'll contact these people, I'm sure they'll stick up for me.'" -- Jerry Seinfeld

Unfortunately for Jerry, checks are part of life, and they aren't going away any time soon. The same can be said for debit cards, credit cards, and mortgages. That's why I've chosen Bank of America (NYSE: BAC  ) as a top blue-chip stock. This diversified bank and financial-services provider has a long history of success dating back to 1874. It's one stock you can feel comfortable buying today and holding for 30 years.

You're probably familiar with Bank of America. In fact, there's a good chance you have an account there, since it has the largest branch network in the country. The company has an impressive resume:

  • No. 1 consumer card issuer in the U.S.
  • No. 1 home equity lender
  • No. 1 in deposits

Bank of America still has opportunities to grow, despite being a financial behemoth. We'll come back to those opportunities in a minute. First, let's look at how the company makes money.

Not your average bank
Bank of America has a plethora of financial services for consumers, businesses, and institutions. This table shows that commercial banking made up only half of revenue and net income year-to-date. Diversified revenue streams enable the company to churn out the green stuff in good times and bad.

Revenue

Net Income

Consumer and Small Business Banking

55%

53%

Corporate and Investment Banking

32%

35%

Wealth and Investment Management

10%

10%

All Other

3%

1%

Bank of America is diversified geographically, too. It has a strong presence across the United States and operates in key markets like the Southeast, California, and Texas. Its 5,800 branches and 16,000 ATMs spread across the country make it one of the more convenient places to bank.

You might be surprised to find that only 6% of revenue comes from outside the U.S. Compare that to JPMorgan Chase (NYSE: JPM  ) and Citigroup (NYSE: C  ) , with 21% and 67% foreign revenue, respectively. Bank of America has a careful strategy of buying small stakes in foreign banks. Recently, it acquired a 7.4% stake in Brazil's Banco Itau (NYSE: ITU  ) in exchange for its branches there.

Analysts say that this strategy is a low-risk way to tap growing markets. Bank of America has similar deals in China and Mexico. CEO Ken Lewis doesn't see the point of expanding unnecessarily around the globe. "Being unimportant in a lot of places around the world is just not a Bank of America strategy or philosophy," he explained in an analyst conference call. In this Fool's opinion, this focused strategy is refreshing in a world of empire builders.

So where's the growth?
Bank of America will likely rely on organic growth rather than acquisitions (laws restrict a bank from controlling more than 10% of U.S. deposits through a merger). Ken Lewis sees opportunities in small-business lending, mortgage loans, and cross-selling to more affluent customers.

With a market cap of $245 billion, though, you're not going to find Hansen Natural-like growth over the next 10 years. Earnings growth will come from cost savings and economies of scale. Exciting stuff, right? Don't underestimate the importance of scale in banking. It's already paying off for Bank of America, and the merger with MBNA offers significant opportunities for future cost savings.

Remember, these are blue chips we're talking about. I'll take slow and steady any day. Bank of America will still be making loans and taking deposits in 2025. I don't know what Apple, eBay, or Google will be doing in 20 years.

Final thoughts
Bank of America pays out a saucy 4.1% dividend, and it trades at lower earnings multiples than most of its peer group. It also looks reasonably valued compared to its historical multiples.

Company

P/E

Dividend Yield

Bank of America

12.8

4.1%

Citigroup

12.0

3.9%

JPMorgan Chase

13.4

2.9%

Wachovia (NYSE: WB  )

12.7

4.0%

SunTrust (NYSE: STI  )

13.5

3.1%

BB&T (NYSE: BBT  )

13.7

3.9%

*Normalized trailing P/E provided by Capital IQ.

I am not the only one taking a strong look at this company. Eighty-seven All-Stars in Motley Fool CAPS think the company will outperform the S&P 500, compared to only three bears. In addition, Bank of America was singled out by the Motley Fool Income Investor team last year for its growing dividend.

If you agree with that position and consider Bank of America a great stock, let us know in our brand-new Motley Fool CAPS community intelligence database by rating Bank of America an "outperform." And if you disagree, go ahead and rate it an "underperform." Our goal is to harness the power of individual investors to help determine the best blue chip for 2007. You can help by joining CAPS and offering your thoughts. Just click here to get started.

To read about the rest of our blue-chip candidates, click here.

Related Foolishness:

Financial Services sector head Joey Khattab does not own any of the shares mentioned. JPMorgan Chase and Bank of America are recommendations ofMotley Fool Income Investor. eBay is a Stock Advisor choice. The Fool has a disclosure policy.


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