B of A Wants Uncle Sam Out -- Should You Get In?

Bank of America (NYSE:BAC) wants the government out of its capital structure (and, by extension, its affairs), and it wants to start Uncle Sam on its way by repaying the $20 billion in direct aid it received as an incentive to close the Merrill Lynch acquisition. As B of A prepares a government exit, should investors take the entrance door by picking up some of the bank's common shares?

Bank of America -- unplugged
A first repayment of TARP monies would be significant in helping B of A catch up with peers JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS), who have already returned the government's investments.

Having the government on board could well act as an anchor on the business … and the stock. As Bank of America CEO Ken Lewis told Bloomberg TV in a May interview: "Every institutional investor that we talk to says that you're not going to realize the full value of your stock until you get the government out and you don't have that threat of them doing something or running your business."

Short-term catalyst vs. long-term value
Will the government's exit act as a short-term catalyst for the stock? Perhaps, but I don't think that's a bet worth making; after all, the stock has already rallied nearly 600% from its March low, as the fear of a wholesale government takeover has receded.

A better reason to consider buying the shares is that they don't look absurdly expensive on the basis of their normal earnings power. As the following table indicates, as investors with a multi-year time horizon look beyond current-year earnings, the numbers start making a lot more sense:

Source: Capital IQ, a division of Standard & Poor's.

Last thoughts
All the same, this is no "high conviction" recommendation: First, at similar valuations (from the next fiscal year on out), I prefer Wells Fargo and JPMorgan Chase to B of A. Second, since I expect a broad correction in U.S. stocks, I think investors will get other opportunities to pick up bank shares at better prices over the next 12 to 24 months.

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