Monday, July 28, 2008

Bank of America (BAC) Dividend Analysis

Bank of America Corporation, a financial holding company, provides a range of banking and nonbanking financial services and products in the United States and internationally.

BAC is a dividend aristocrat as well as a major component of the S&P 500 and Dow Jones Industrials indexes. The company has been increasing its dividends for the past 30 consecutive years. From 1998 up until July 2008 this dividend growth stock has delivered an annual average total return of 3.60 % to its shareholders. Despite the 60% recent jump in the share price, the stock is down almost 26% since the start of the year.

At the same time company has managed to deliver a 9.60% average annual increase in its EPS since 1998. So far this year BAC has reported EPS of $0.95 for the first half of 2008. The expectations are that the company will deliver EPS of $0.72 per quarter for the remaining two quarters of 2008.

The ROE has declined steadily from the highs in 2004 at 29%.

Annual dividend payments have increased by an average of 12.70% annually over the past 10 years, which is higher than the growth in EPS. A 12% growth in dividends translates into the dividend payment doubling almost every 6 years. If we look at historical data, going as far back as 1990, BAC has indeed managed to double its dividend payment almost every six years on average.

Future dividend increases will be harder to make given the current situation of the US financial system. Management recently affirmed that it would continue with its quarterly payment of 64 cents/share. This leaves them 4 more quarters where they could keep the dividend growth unchanged before BAC loses its dividend aristocrat status. There are rumors however that the company will have to cut the dividend in order to maintain its current liquidity and conserve capital.

If we invested $100,000 in BAC on December 31, 1997 we would have bought 3289 shares (Adjusted for a 2:1 stock split in 2004). In March 1998 your quarterly dividend income would have been $625. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $3143 by June 2008. For a period of ten and a half years, your quarterly dividend income has increased by 237%. If you reinvested it though, your quarterly dividend income would have increased by 403%.

The dividend payout has remained stable until the deterioration in earnings in after 2007. I estimate that the payout will be at 108% if the projected earnings per share of $2.38 materialize and the quarterly dividend payment stays flat at 64 cents/share. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

BAC offers an above average yield, coupled with a low P/E ratio. The dividend payout is unsustainably large at this moment for me however in order to initiate a position. In addition to that, the whole uncertainty over the financial sector definitely makes it wiser to simply wait on the sidelines before jumping in.

Disclosure: I do not own shares of BAC

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