Alternative history has little to no place in investing. But it can still be fun and interesting.
With this in mind, I've calculated what Bank of America's (NYSE:BAC) share price would be today if the lender hadn't diluted its shareholders during the financial crisis. As you can see in the chart below, on two separate occasions, excluding Warren Buffett's $5 billion investment in 2011, B of A sauntered up to the trough of the public capital markets and engorged itself.
In May of 2010, it issued 1.25 billion shares in exchange for $13.5 billion in cash. And in February of 2010, the bank issued an additional 1.29 billion shares in order to repay its TARP funds. Taken together, along with a handful of smaller dilutive events, B of A's outstanding share count went from 6.4 billion at the beginning of 2009 to 10.8 billion today -- notably, prior to the Merrill Lynch acquisition, which closed on the last day of 2008, B of A's outstanding share count was only 5 billion.
There are two relevant takeaways, here. First, the dilution in and of itself has cut B of A's share price roughly in half. Was it necessary? I don't think there's any credible argument that it wasn't; without the additional capital, B of A's shares may very well have gone to $0.
The second takeaway is that this is what happens when a financial firm gets overly acquisitive. While this is well-worn territory, it's far too easy to forget. In this day and age of growth at all costs, it's important to remember the potential damage such a strategy can sow. The obvious exception is when a bank is able to truly get a deal, as JPMorgan Chase (NYSE:JPM) did when it purchased Washington Mutual, Wells Fargo (NYSE:WFC) did when it took over Wachovia, and Huntington Bancshares (NASDAQ:HBAN) has done in its acquisition of two smaller banks from the FDIC.
Starting early in his tenure at the helm of B of A, the former-CEO Ken Lewis carried on the bank's habits of acquiring either direct competitors or operations that conceivably offered operational synergies. In 2004, B of A paid $47 billion for FleetBoston Financial. In 2004, it purchased credit card giant MBNA for $35 billion. In 2006, it acquired U.S. Trust from Charles Schwab (NYSE:SCHW). In 2007, it bought regional lender LaSalle Bank for $21 billion. And in 2008, it fatefully took on both Countrywide Financial and Merrill Lynch.
All along the way, Lewis steadfastly refused to raise more capital. Until it was too late, that is. Up until February of 2008, B of A could have gone to the market and raised capital at $40 to $50 per share. As a result of Lewis' obstinacy, however, it didn't do so until the bank's shares were trading around $10. To add insult to injury, in 2006, B of A repurchased $14.4 billion in shares at an average price of $49.35 per share. And in 2007, it spent $3.8 billion to buy back 73 million shares at an average price of $51.42.
But that's all history. The future, at least for now, looks much better. B of A's current CEO, Brian Moynihan, has repudiated Lewis' growth-at-all-cost strategy. As Shawn Tully of Fortune recounted, upon taking the job in 2010, Moynihan promised to follow a rigid set of principles: "Sell virtually every asset unrelated to bedrock banking. Forget all acquisitions, now and forever. Don't grow total loans, but do change the mix so B of A won't be overexposed to risky consumer credit in a bad cycle."
In addition, and particularly pertinent to the present discussion, Moynihan is committed to reversing the dilution charted above. His strategy since taking over at the beginning of 2010 has been to build a "bulwark of capital" and then deliver all earnings beyond that to shareholders. "We need to get back most of the shares we issued in the crisis, that caused all the dilution," Moynihan told Fortune's Tully. Whether he can do this, of course, remains to be seen. But I think we can all agree that it's a noble objective.