Please ensure Javascript is enabled for purposes of website accessibility

Bank of America's Dividend Plans

By John Maxfield - Sep 20, 2013 at 2:49PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How much can shareholders expect to earn in dividend payouts from the megabank once its earnings normalize?

One of the biggest reasons to own shares of Bank of America (BAC -0.36%) at today's price is because of the future dividend payout. This is not a short-term strategy. It's one that I believe will pay off in spades only if you're willing to wait for years, if not decades.

"When B of A has built up a sufficient capital cushion, probably two to three years from now, [Brian Moynihan] plans to return all earnings to investors in dividends or share buybacks," wrote Fortune author Shawn Tully two years ago after an extensive interview of Bank of America's chief executive officer.

Just how much it will return is a function of two things. It's first and foremost a function of how much Bank of America will earn once everything normalizes -- by this I mean once it's finally done paying off the liabilities related to the financial crisis.

At Bank of America's investor day in March of 2011, Moynihan predicted that the bank will ultimately earn somewhere between $35 and $40 billion on an annual pre-tax basis. Strip out taxes, and you're left with somewhere in the neighborhood of $25 billion.

I, and others for that matter, have a tendency to think that Moynihan's estimate was probably a bit ambitious, and that the actual figure will come in closer to $20 billion on a pre-tax basis. This would leave roughly $15 billion after taxes.

With both of these estimates in mind, it isn't entirely unreasonable to believe that the nation's second largest bank by assets will end up earning somewhere between $1.50 and $2.50 a share in a typical year.

This brings us to the next question, which concerns how generous Bank of America will be with its capital return. As the quote above suggests, the bank's leaders at least seem to be committed to the idea of returning the vast majority of excess capital to shareholders -- as it should, I might add.

But how much will come via dividends and how much via share buybacks remains to be seen. In the same interview cited above, Moynihan seemed almost maniacally focused on counteracting the dilution that happened in the midst of the financial crisis. "We need to get back most of the shares we issued in the crisis that caused all the dilution," he told Fortune's Tully.

Taking that at face value, it would mean the bank will favor buybacks over dividends -- which, in my opinion, could ultimately turn out to be a dubious strategy if the bank's share price continues to rise.

But perhaps this is speaking too soon. At last week's Barclays Global Financial Services Conference, Bank of America's chief financial officer Bruce Thompson touched on the issue:

I would say, overall strategy with dividend policy from our company, as what you'd expect, is that you want to increase the dividends into a growing stream of predictable, recurring earnings and, over time, have a dividend as those earnings happen and, as any remaining legacy issues go away, that you get into the 25% to 30% payout ratio from trailing earnings relative to dividend payout. And then the balance of capital return beyond that is going to come from share repurchase in the future, possibly even something from a special perspective.

Again, taking Thompson's statement at face value, this would mean that shareholders could eventually be looking at between $0.45 and $0.75 per share in annual dividends. At today's price, that would put the dividend yield at between 3.1% and 5.2%.

Will this alone make you rich? No. But with the associated share price appreciation that would be likely to occur under this scenario, along with a robust buyback program, there's every reason to believe Bank of America would be a worthwhile cornerstone in any investor's portfolio.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$36.28 (-0.36%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.