While Bank of America's (NYSE:BAC) fundamental performance has improved significantly since the financial crisis, its book value per share hasn’t grown as fast as most investors would probably like. This matters because a bank’s stock price is in large part derived from its book value per share -- if book value goes up, so too should its stock.
Bank of America’s book value per share has grown 15% since the beginning of 2010. That compares to a 47% average among the two dozen big bank stocks on the KBW Bank Index over the same stretch.
Book value per share is an easy metric to understand. To calculate it, take Bank of America’s shareholders’ equity, which is at the bottom of its balance sheet, and then divide that by the North Carolina-based bank’s outstanding share count. In Bank of America’s case, that gives you $24.36.
There is no general rule that governs how quickly a bank’s book value per share should grow in any given year. That said, it’s fair in the low-interest-rate environment we’re in right now, which weighs heavily on bank profits, to expect a bank’s book value per share to increase by 5% or more a year, with many banks coming in above that.
One thing to keep in mind is that the pace at which a bank’s book value per share grows isn’t only about how much money it earns; it’s also about how much of that income it retains. The more a bank pays out via dividends and buybacks, the less it retains to buttress book value.
What one sees, in fact, is that there tends to be a negative relationship between a bank’s total payout ratio (dividends plus share buybacks divided by net income) and the growth rate of its book value per share. Holding all else equal, the higher the payout ratio, the lower the growth rate.
Bank of America serves as somewhat of an exception to this general rule. It’s ranked 20th out of 23 banks on the KBW Bank Index when it comes to growth in book value per share since 2010. But it currently has the 7th lowest total payout ratio, coming in at 60% over the trailing 12 months, compared to a peer group average of 73%.
There are a variety of explanations for this, but first and foremost is that Bank of America’s profitability has trailed its peers for most of the past decade. And because it has earned less income, it has had less to retain, irrespective of its total payout ratio. As Bank of America’s recovery continues, in turn, investors should start to see that translate into a more rapid ascent in the bank’s book value per share.