Bank of America (BAC -0.21%) is an iconic name in the finance industry. The company appears to have improved its business since the Great Recession, with the dividend back on a solid growth track after that difficult period. But should investors buy this bank? Here are a few reasons why you might want to take a pass.
1. Bank of America is a complex beast
With a market cap of more than $260 billion, Bank of America is a very large company. Just being large isn't a bad thing. In fact, it can bring with it economies of scale, among other benefits. However, there's another subtle issue that investors need to consider with regard to this particular large company. Increased size can also lead to increased complexity.
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The core of Bank of America's business is its traditional banking operation, which generated $2.8 billion in net income in the fourth quarter of 2024. That business is likely more complex than you imagine, but you can probably wrap your head around the basics easily enough. After all, you use banking services all the time. What gets a bit more difficult is understanding the company's other three divisions, which together made up around $4.1 billion in net income in the final stanza of 2023. Collectively, they are more important to the overall operation.
The global wealth and investment management, global banking, and global markets divisions are not quite as simple to understand as traditional banking. They span a broad spectrum of activities, requiring you to keep track of a lot more when examining the company's financial results. It isn't bad that Bank of America has these divisions, but this company is not just a simple U.S. bank.
2. Bank of America's dividend is so-so
As noted above, Bank of America cut its dividend during the Great Recession. That's not a good thing, but that was a long time ago at this point. The dividend is back in growth mode, as well, so the dividend isn't exactly a negative. However, investors shouldn't just give the dividend story a pass.
If you take a look at Bank of America's 2.8% dividend yield, it is toward the high end of the yield range over the past decade. That suggests that the stock may be historically cheap right now. But the yield is just average for a bank, using the SPDR S&P Bank ETF (KBE -0.31%) as an industry proxy.
In other words, you could get the same amount of income and a lot more industry diversification by buying a bank-focused exchange-traded fund (ETF). Given the complexity of Bank of America's business, that's a risk/reward trade-off that will be worth considering for more conservative investors.
3. Bank of America is preparing for hard times
The last reason to consider staying on the sidelines with Bank of America isn't really specific to the bank. It's more a comment about the broader banking sector. That said, Bank of America is specifically commenting on the broader issue, and investors should be paying close attention. For example, during the company's Q4 2023 earnings conference call, management noted that it is preparing for a nearly 5% unemployment rate by the end of 2024. The current unemployment rate remains far lower at 3.7% or so, meaning that management thinks the economic environment in the United States will get more difficult, not easier.
On top of that, the company highlighted that net charge offs rose sequentially from the third quarter. There were specific reasons given for this change, but it still hints that customers may be feeling a bit more financial pressure than they were in the recent past. Given the swift rise in interest rates, that would not be at all surprising.
To be fair, management sounded quite upbeat about Bank of America's future on the call. But do you want to buy a bank when it's talking openly about the future being more difficult than the present?
Bank of America is not a bad bank
If you're looking for a large bank to buy right now, Bank of America would probably be just fine. However, you need to go in knowing that it is a complex entity. You need to understand that the yield is middling, at best, even though it is historically high for Bank of America. And you need to accept that the near future, as management is pointing out, could present an increasingly difficult operating environment. These are all good reasons to not buy Bank of America stock today.
