Bank of America (BAC 1.64%) has been one of the best-performing stocks in an impressive financial sector over the past couple of years. The stock has risen by more than 38% over the past year and is up a staggering 163% since its February 2016 lows, handily beating the performance of the S&P 500 and the overall financial sector.
After such a remarkable run, it's only natural to wonder whether Bank of America's stock could be getting a bit expensive. However, there's a solid case to be made that the gains are well justified, and the bank's management recently announced a move that indicates that they still think the stock is cheap. After an already-massive buyback announcement earlier this year, Bank of America is planning to spend billions more to buy back its own stock.
Why Bank of America's stock has performed so well
Bank of America's stock has soared, but that doesn't mean that it's necessarily expensive. In fact, I would argue the exact opposite.
For starters, there have been several industrywide catalysts that have caused bank stocks as a group to be among the top performers in the market. The Federal Reserve has started to raise interest rates, and is widely expected to continue doing so. This has resulted in expanded profit margins for banks, and could lead to billions in additional profit over the next few years if rates continue to climb.
In addition, the banking industry could be one of the biggest beneficiaries of a lower corporate tax rate, and of looser banking regulations. Some expectation of this is certainly priced into the stock at this point, but these could still be positive catalysts once they're official.
Finally, Bank of America has been one of the most impressive turnaround stories in the post-financial-crisis banking industry. The bank's income continues to rise, asset quality continues to improve, and the company has done an excellent job of cutting expenses, embracing new banking technologies, and running a much more efficient operation.
The bank's massive buyback plan just got even bigger
Bank of America already had implemented one of the largest buyback plans in the industry earlier this year. The bank had announced that as part of its approved capital plan, it would repurchase $12 billion worth of its common stock between July 1, 2017, and June 30, 2018. This is more than double the previous year's buyback authorization, and came in addition to a big dividend increase, and is in addition to the $0.9 billion in repurchases the company plans to make to offset its equity-based compensation during that period.
Recently, the bank announced that it was increasing its buyback by an additional $5 billion, meaning that Bank of America plans to buy back a total of $17 billion in stock by June 30, 2018.
This increase has already been approved by the Federal Reserve, and is a result of the increased amount of capital the bank has after Berkshire Hathaway exercised its warrants and became the bank's largest shareholder, as well as from the sale of its non-U.S. credit card business earlier in 2017.
Generally, a company buys back stock when it feels that it is the most compelling way to return capital to shareholders. Bank of America's management has said that it feels its stock is an attractive long-term value, even at 2017's higher share prices, and that it plans to emphasize buybacks for the foreseeable future. With this latest move, the bank's management is putting its money where its mouth is.
Here's how big Bank of America's buyback is
To give you an idea of just how big Bank of America's buyback program is, consider that the one-year buyback authorization of $17 billion is enough to repurchase nearly 6% of the bank's outstanding shares, even at the current share price, which is a nine-year high for the bank. In fact, it's just about $3 billion short of negating the dilutive effects of Berkshire Hathaway's massive common stock purchase entirely.
In a nutshell, Bank of America's choice to use its excess capital to buy back even more stock sends a clear message to investors that the bank's management doesn't consider the stock to be expensive yet.