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Bank of America
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Scorn at Bank of America

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By babyfrog
December 5, 2003

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Bill,

You are absolutely correct that Bank of America dramatically overpaid for Fleet. There is no question about that. And you're right; there is a clear link between the size of a company and the compensation that the company's upper management receives.

Just one comment about your article: BofA's stock immediately tanked 10%... The stock should have gone down even more than that.

Just how cheap did you want Bank of America to become? At its low, post announcement, Bank of America traded at $72.45 per share. With about $7.00 per share in trailing twelve months EPS, that puts the company at about 10.35 times trailing earnings. With a $3.20 per share dividend, that gave the company a yield of over 4.4%.

Not only is the current yield huge in this market, but the company has grown its dividends at a compound annual growth rate of over 13% for the past decade. If the dividend doesn't change between now and the end of 2004, at will still be around 11% higher than during calendar year 2003. It's not like Bank of America is shrinking down to nothing. It's not like the company is falling off the face of the Earth. It's not like the company hasn't provided cold, hard cash for its shareholders.

Bank of America overpaid for yet another acquisition. Predictably, its stock took a nosedive as a result. The company is a steal, according to the Graham equation.
Here's the equation from the Fool's article: ProjEPS*(8.5+(2*G))*(4.4/AAA)

According to Moody's, the AAA bond yield is now 5.64%. According to Quicken.com, BAC is expected to grow earnings at 9.6% annualized over the next five years, with next year's earnings of around $7.10 per share (according to these estimates.)

Plugging the numbers into the Graham equation, BAC should be worth:
7.1*(8.5+(2*9.6))*4.4/5.64, or about $153.43 per share. Cut the growth rate in half, and the company should be worth $76.71, or still more than it is today.

Plugging the company into the dividend discount model, presuming a 12% required rate of return (better than market historicals), an 8% dividend growth rate (below recent history), and a current annual dividend of $3.20, the company should be worth 3.2/(0.12 - 0.08) = $80.00. Which is more than it trades at today.

Yes, the company overpaid for another acquisition. Yes, the people who will make out the best will probably be the BAC executives. How much farther could the stock have really fallen? Unlike the dot.com implosion, there is a real company, with real assets, real earnings, and real dividends underlying Bank of America. There is only so far that even this kind of bad news will allow a company with this kind of profile to fall.

-Chuck


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