When it comes to returning capital to shareholders, Bank of America's (NYSE:BAC) dividend tends to get the most attention. This is especially true after 2017's massive dividend increase that prompted Warren Buffett to finally exercise Berkshire Hathaway's warrants to buy 700 million shares of Bank of America's common stock.
However, dividends are a surprisingly small part of the bank's capital return strategy. The majority of Bank of America's capital return is in the form of share repurchases. In fact, the bank spent nearly $8 billion on buybacks through the first three quarters, and there's reason to believe that this number will swell when the year-end results are released.
Bank of America's 2017 buybacks
Through the first three quarters of 2017, Bank of America returned $10.7 billion to its shareholders, and as I mentioned, most of this came in the form of share repurchases. In fact, the bank spent $7.9 billion of this amount on its buybacks.
At first glance, the math may not make it look like Bank of America has repurchased any shares at all. There were 10.05 billion shares outstanding at the beginning of the year and 10.46 billion at the end of the third quarter. However, remember that 700 million new shares were issued to Berkshire Hathaway, so by subtracting these, you see that there are 290 million fewer shares outstanding now, excluding the effect of Berkshire.
The bank dramatically increased its buyback authorization recently
Bank of America has really accelerated its buyback program in recent years. The bank expects to return $14.2 billion to shareholders in 2017, with most of this amount coming from buybacks. In 2016, the bank returned less than half of this amount.
And this may actually be a conservative estimate. In fact, since the bank revealed this estimate, management has announced that $5 billion is being added to the current buyback authorization, which runs from July 1, 2017, through June 30, 2018. The bank previously planned to buy back $12 billion in stock during that time period, so this translates to a 42% increase.
Should investors be happy?
To be fair, the reasons for Bank of America's emphasis on buybacks don't all have to do with management believing the stock is cheap.
As I discussed in a recent podcast, another advantage to buybacks (from a company's standpoint) is that they're much more flexible than dividends. In other words, if it cuts its dividend, it generally results in a wave of negative headlines and speculation that the company must be struggling. Meanwhile, if it reduces its buyback rate, few shareholders would even notice.
Bank of America CEO Brian Moynihan has specifically said that the company will continue to favor buybacks over dividend increases for this very reason. Investor perception of Bank of America's financial health is just starting to become positive, and a forced dividend reduction could be a disaster. On the other hand, the bank could easily decide to buy back fewer shares next year without much repercussion.
Having said that, management has said that it also believes its shares are a good value, and largest shareholder Warren Buffett has voiced his agreement. Moynihan has said that "our stock's a good buy and we'll continue to buy it until the cows come home." And Buffett, who famously advocates holding stocks for long periods of time, has said that "We (Berkshire) will be holders of BofA stock for a long, long, long time."
So, as a Bank of America shareholder myself, I'm happy that the bank is aggressively buying back shares and intends to continue doing so for the foreseeable future.