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Why This Week Is Huge for Bank of America

By John Maxfield - Mar 24, 2014 at 6:00PM

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On Wednesday, Bank of America is set to announce whether or not it will increase its dividend.

This is the most important week of the year for Bank of America ( BAC -1.42% ), as the nation's second largest bank by assets will learn on Wednesday whether it can increase the amount of capital it returns to shareholders via a bigger dividend and/or share buybacks.

The results of this year's stress tests, which were released by the Federal Reserve last Thursday, seem to bode well for the Charlotte-based bank. While its Tier 1 common capital ratio dropped from 11.1% down to 6% under the test's severely adverse scenario, it nevertheless exceeded the minimum threshold of 5%.

This isn't to say that Bank of America is entirely out of the woods. Of the 30 bank holding companies examined, its final Tier 1 common capital ratio was lower than all but Zions Bancorporation and M&T Bank, which emerged from the hypothetical scenario with ratios of 3.5% and 5.9%, respectively. The average for the group was 7.8%, or nearly two percentage points higher than Bank of America's.

At the same time, there's simply no question that Bank of America is in a better place today than it was at this time last year. Its earnings are becoming increasingly consistent and it has more than enough capital to fund an increased dividend as well as a new share buyback program.

Does this necessarily mean that Bank of America will finally boost its quarterly distribution? Not necessarily, as there are at least four reasons that CEO Brian Moynihan favors buybacks over dividends for returning capital to shareholders. But if I were a betting man, I'd guess that he does a little of both.

Either way, we'll know this Wednesday at 4:00 p.m. EDT.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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