Let me cut to the chase. I believe Bank of America (BAC -0.49%) will increase its dividend payout in the first half of next year. This will be a coup for current shareholders because, as it has at Wells Fargo (WFC -0.95%) and JPMorgan Chase (JPM -0.41%), beyond simply providing a higher quarterly payout, its shares will almost certainly appreciate in value -- our in-depth report on the bank even goes so far as to estimate that they could "double or triple" in value within the next five years.
Why B of A's dividend is headed higher
At the end of the day, there's only one thing that's held B of A back from already doing so: regulators. New rules passed since the financial crisis mandate that banks request permission from the Federal Reserve before returning capital to shareholders through either stock buybacks or dividends. At the beginning of 2011, for example, the Fed rejected B of A's request for a "modest" increase. More recently, it denied a similar proposal from Citigroup (C 0.20%), leading some to conclude that this factored into Vikram Pandit's "resignation" -- I put it in quotation marks because there's significant evidence that the move wasn't even remotely voluntary.
But that was then, and this is now. Then, B of A was facing a seemingly infinite amount of liability for its actions before and during the financial crisis -- or, more accurately, the actions of Countrywide Financial, a subprime mortgage originator that B of A acquired in 2008. Now, although it's not out of the woods yet -- this lawsuit filed by the Justice Department shows why -- there's much greater certainty with respect to its potential exposure.
Since then, it's settled with the lion's share of private investors in securities backed by Countrywide-originated mortgages, concluded the National Mortgage Settlement relating to its mortgage-servicing practices, and settled a class action lawsuit stemming from its 2008 acquisition of Merrill Lynch. Most importantly, as I've noted previously, we now have at least a rough estimate of its maximum exposure to liability related to repurchase requests from Fannie Mae and Freddie Mac -- for more about this, click here.
In addition, over the upcoming quarters, more and more revenue will be incrementally freed up to distribute. Its net charge-offs dropped by $170 million in the third quarter and should continue to decline. Repurchase requests now appear to be capped at $6 billion in excess of stated reserves. And finally, B of A is forging ahead with its New BAC initiative, under which it will cut upwards of $8 billion in expenses on an annual basis; its employee count dropped by 3,000 in the third quarter of this year alone.
Finally, B of A's capital levels are well above where they need to be currently, and they've climbed even faster than expected -- notably, this is one of the three areas that our in-depth report on B of A implores investors to watch closely. In its just-completed third quarter, B of A estimated its Tier 1 common capital ratio under the proposed Basel III framework at 8.97%. Notably, its goal for the end of 2012 was 7.5% -- and it still has a full quarter to increase it further. In other words, there's virtually no reason whatsoever for the bank to continue retaining capital at the rate it currently is.
Magic 8-Ball says "outlook good"
Look, I can't predict the future any better than you can. But all of the evidence suggests to me that B of A will be in a position to increase its dividend at the beginning of next year after submitting its capital plan to regulators. I could be wrong -- just ask my wife; she'll give you a thesis on the subject -- but I believe this likelihood makes B of A a buy for investors that are willing to accept the risk and are looking to lock in a future double-digit yield.
For a list of additional reasons that Bank of America is a buy, as well as a full briefing on the risks associated with holding its stock, download our in-depth report on the bank. In it, as I said earlier, our in-house banking analyst Anand Chokkavelu explains why shares in the bank could "double or triple in the next five years." To claim your own copy of this report, as well as quarterly updates, simply click here now.