Bank of America Approves Massive Stock Buyback

Ever since taking over as CEO of Bank of America (BAC +0.75%), one of Brian Moynihan's top priorities has been to reduce the dilution to shareholder value that occurred during the financial crisis. The bank has been chipping away at this with modestly sized buyback programs over the last few years, but on Wednesday, it doubled down by announcing a significant increase to its current repurchase authorization.

Bank of America's board has authorized the repurchase of $12 billion worth of common stock over the next 12 months. That's more than double the $5 billion buyback program it approved last year. Bank of America also raised its quarterly dividend by 60% to $0.12 a share, up from $0.075 per share.

Data source: Bank of America.

Bank of America's moves come on the heels of the Comprehensive Capital Analysis and Review, or CCAR. This is the second stage in the annual stress tests that are used to assess whether that nation's biggest banks have enough capital to survive an economic downturn similar to the financial crisis. The results from the first stage -- known as the Dodd-Frank Act stress tests, or DFAST -- were released last week.

All 34 of the banks that took the CCAR this year passed, the Federal Reserve announced on Wednesday, though Capital One Financial must submit a new capital plan within six months that addresses weaknesses in its capital planning process.

Brian Moynihan, the Chairman and CEO of Bank of America. Image source: Bank of America.

For its part, Bank of America passed with flying colors. To satisfy regulators, a bank must maintain a sufficient amount of high-quality, highly liquid capital through a nine-quarter horizon that assumes, among other things, that the unemployment rate shoots up to 10%, gross domestic product falls by more than 6%, and that real estate prices drop by a quarter to a third, depending on whether it's residential or commercial property.

The benchmark is a common equity tier 1 capital ratio, or CET1 ratio, of 4.5%. Going into the test, Bank of America's CET1 ratio was nearly three times that, at 12.1%. That fell to 8.9% at the low point of DFAST, the first round of the stress tests. And then after factoring in Bank of America's planned capital raise, it declined to 6.8% at the low point of the CCAR analysis. That's a big drop, but it still comfortably exceeds the 4.5% regulatory minimum.

Data source: Federal Reserve.

The net result for Bank of America's shareholders is that the nation's second biggest bank by assets is now in a position to start delivering in a meaningful way on Moynihan's early vow to reduce the bank's outstanding share count, and thereby reverse some of the damage done to shareholder value during the crisis.

This year's $12 billion repurchase authorization positions Bank of America to repurchase 5% of its outstanding share count. It's hard to interpret this as anything but good news for shareholders of the Charlotte, North Carolina-based bank.