Most people who live in the United States will know the name Bank of America (BAC -0.13%). That, however, isn't a good reason to buy the stock and, in fact, its well-known brand might blind you to some of the inherent problems with owning it today. Here are a few reasons why you might find other banks more interesting than Bank of America right now.
A few problems
While those who use Bank of America's services have little to worry about, investors in the stock shouldn't enjoy the same confidence. Most notably, for dividend investors, is the fact that Bank of America was forced to cut its dividend during the Great Recession. To be fair, there were very real concerns at the time that the financial structure of the entire world might implode. And Bank of America wasn't alone in cutting its dividend by any stretch of the imagination. However, there were some banks that managed through this difficult period without a dividend cut.
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Some numbers might help. Bank of America's dividend fell from $0.64 per share per quarter to a single penny. That's a token amount meant to allow institutional investors with a dividend mandate (like pensions and insurance companies) to continue to own the shares. This isn't to suggest that Bank of America is in the same situation right now, but that history should lead more conservative investors to think twice about the stock. By comparison, Canada's Toronto-Dominion Bank (TD -0.42%) held its dividend steady through that period.
Also notable, Bank of America's dividend is now only back to $0.22 per share per quarter. Even those who held through the dividend cut aren't back to where they were before, income-wise. Toronto-Dominion's dividend, meanwhile, has grown since the 2007 to 2009 economic downturn.
In addition to the absolute level of the dividend payment, investors should also consider the dividend yield. Bank of America's yield is 2.4%. That's below the average bank yield of roughly 3%, using SPDR S&P Bank ETF as a proxy. It's also well below the 4.1% yield you could get from an investment in a peer like TD Bank, which I happen to own.
Hard times ahead
One of the problems with investing in a bank at all right now is that investors fear a recession could take shape in 2023. That would likely mean reduced demand for bank services, specifically loans, and an increase in borrower defaults. This would put pressure on bank earnings across the board, and Bank of America is no different. And yet investors appear to be paying a premium for its shares, given its below-peer dividend yield.
That might be acceptable if the bank were better prepared than any other bank for a downturn, but it isn't. A quick way to examine that is to look at the Tier 1 Capital Ratio, which is an industry metric that attempts to assess how well a bank will handle economic hardship. Higher numbers are better. Bank of America's Tier 1 ratio is around 11.2%. That's not bad, but TD Bank's ratio is 16.2%, the second-highest in North America. Of the two, TD Bank appears to be better positioned to deal with adversity.
That's not to suggest that TD Bank is perfect; far from it. However, given the two options, TD Bank has a higher yield, a better dividend history, and a stronger position going into a potential recession in 2023. There's a reason why I personally own TD Bank and not Bank of America.
Better options
If you are looking at banks thinking you can find some bargains at a time when investors are worried about the industry's near-term prospects, I wouldn't put Bank of America on your buy list. Despite some very notable negatives for BofA, investors appear to be affording it a premium valuation compared to peers, like TD Bank, that look better positioned today and that have much better track records. There's no reason to rush to buy Bank of America when you step back and look at it from a big-picture perspective.
