Please ensure Javascript is enabled for purposes of website accessibility

Bank of America Will Increase Its Dividend (We Just Don’t Know When)

By John Maxfield - Nov 13, 2013 at 7:30AM

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

If you’ve been waiting for Bank of America to announce a dividend increase, then there's good news and bad. The good news is that there’s little doubt such a move is coming. The bad news is that we don’t know when.

If you've been waiting for Bank of America (BAC -0.54%) to announce a dividend increase, then I have good news and bad. The good news is that there's little doubt such a move is coming. The bad news is that we don't know when.

It's important to appreciate that this decision isn't Bank of America's alone to make. As a systematically important financial institution, it's subject to tight regulatory scrutiny. When it comes to dividends in particular, it's obligated to seek approval from the Federal Reserve as part of the annual comprehensive capital analysis and review, or CCAR, the results of which are due at the beginning of next year.

Many analysts, myself included, had assumed at this point last year that Bank of America would both ask for and receive permission to increase its currently nominal $0.01-per-share dividend. The reasoning was that it had put a number of its biggest legal issues behind it and had improved its capital position considerably compared to the year-ago period.

As we came to find out, however, the Charlotte-based bank wasn't approved for an increase because it didn't ask for one. It decided instead to push for a $5 billion common stock repurchase plan (as well as a $5.5 billion program to redeem preferred stock). As CEO Brian Moynihan said at the time, "We believe buying back common shares is the best way to continue to drive value for our shareholders."

With the passage of another year, it's become increasingly clear that one reason Bank of America neither asked for nor gratuitously received permission to boost its quarterly payout has to do with the predictability of its earnings. "With the dividend question," Moynihan said earlier this year, "the number one issue for us is to continue to get the recurring earnings stream back to the normal level that it should be."

The bank's chief financial officer Bruce Thompson touched on the same issue at an industry conference in late September: "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."

Taking these statements at face value, it seems clear that Bank of America's executives are committed, at least in theory, to increasing the dividend payout. It also seems clear that they intend to increase it by a large margin, albeit over time, as the bank paid out less than 5% of its diluted earnings per share in dividends over the past 12 months.

So, will 2014 be the year? I'd say the odds are good that it would be approved for a reasonable increase if it asks for one. I base this guess -- and it is merely a guess -- on the continued progress that Bank of America has made to clean up legacy legal issues as well as its now far-more-than-adequate capital base.

The bigger question, in turn, is whether its earnings are sufficiently predictable to satisfy its executives. I don't know the answer to that, but for what it's worth, we're bound to find out over the next few months.

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
BAC
$32.13 (-0.54%) $0.17

*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
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

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.