Are you ending the year with a little more cash than you expected, but don't feel like throwing that money back into the rapid-fire trading carousel? You're not alone, and you're in luck.
While it certainly seems like the market rally that's been underway since March 2020 has pushed every ticker into overpriced valuations, there are some noteworthy exceptions. More important than that, these exceptions aren't mere short-term speculations; they're built from the ground up to be buy-and-hold positions.
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Among the best names that are worthy of the idle money just sitting in your portfolio is Bank of America (BAC -1.07%). Indeed, its simplicity is a key reason it's so attractive here. Investors can rest easy knowing the company will look about the same three years (or three decades) from now as it does today since consumers and corporations alike will always need help handling their money.
Bank of America isn't just a lender
Boring? You bet. But that's the point. While you may be hoping for short-term swings with your more-aggressive, speculative picks, that's the sort of drama you're trying to avoid with your long-term holdings. Above all else, you want reliability. Bank of America's got it.
Sure, it's in the banking business at a time when being a bank is generally bad news. The industry's profitability on loans is linked directly to interest rates; the higher rates are, the more profitable lending is. The Fed Funds Rate has hovered just above zero since early last year, however, making lending minimally profitable despite strong demand for loans.
Bank of America isn't just a lender, though. In fact, in pre-COVID 2019, before interest rates plummeted again, the company's interest revenue (driven predominantly by lending) only accounted for a little over half of its top line. The rest came from noninterest-related services like credit cards, investment banking fees, and brokerage services.
A resilient cash machine
The onset of the pandemic last year obviously took a toll on all of its noninterest businesses, and the sharp drop in interest rates (as could have been expected) crimped net interest revenue.
Except not as much as you might think. The bank's net interest-based revenue only slipped from 2019's $48.9 billion to $43.4 billion in 2020, a 12.6% lull that wasn't made worse by a contraction of the company's other profit centers.
That's not to suggest it simply sailed through the pandemic's disruption. Bank of America's 2020 return on average tangible common shareholder equity (ROTCE) contracted from 2019's 14.9% to 9.5%. Its average return on all of its assets slipped similarly, from 1.14% to 0.67%. These are important metrics simply because they illustrate how efficiently a bank is using the assets it has listed on its books. A contraction of this magnitude rightfully raises eyebrows.
But through the first three quarters of the current fiscal year, the bank's return on its assets has inched back up to 1.1%; ROTCE is back up to 17.6%. In a similar vein, money earmarked to cover bad loans as of the third quarter of last year was pared down by $2 billion during the third quarter of this year, with the worst-case scenario never quite taking shape. Its customers' total deposits and balances also hit record highs as of last quarter, underscoring the idea that Bank of America has fully shrugged off whatever impact COVID-19 was going to make.
It's all a testament to how well the bank manages itself and its customers. You can buy into this stock at a modest 14 times next year's expected earnings -- which analysts believe will continue to grow, in step with sales growth.
Data source: Thomson Reuters. Chart by author. Revenue data is in millions of dollars.
Its current dividend yield is 1.9%, and it has paid a dividend every quarter for the past couple of decades. And although it hasn't raised its dividend consistently on a yearly basis, it has nearly tripled its quarterly payout over the course of the past five years.
Don't make it complicated
Again, it's boring, but again, boring stocks make for great long-term foundational holdings. This one is no exception, particularly if you're an income-minded investor.
That being said, Bank of America could be on the verge of catching a major tailwind that drives sizable, un-boring gains early on for newcomers. The Federal Reserve's governors collectively believe they'll need to raise the Fed Funds Rate from less than 0.25% now to more than 1.75% by the end of 2024, with a few more rate hikes in the cards after that. Presuming the subsequent upticks in lending interest rates don't upend the economy (and there's no data-supported reason to fear they will), each of those increases will make Bank of America's lending business more profitable than it's been of late. One can also safely assume the company's service and fee-based businesses will continue growing as they have.
The stock is a smart place to park some long-term money you don't want to have to worry about. The trick is simply leaving it alone long enough to let time do its thing.
