Dividend Analysis - Bank of America Corp (NYSE:BAC)
24 July 2007In a discussion with Money Gardener about dividend yields, he mentioned the Bank of America which currently sports a healthy dividend. I told him I would run this stock through my normal hoops and see what we can come up with. Bank of America trades on the NYSE under the symbol BAC.
Company Profile:
From Yahoo Finance
Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services in the United States and internationally. It operates through three segments: Global Consumer and Small Business Banking, Global Corporate and Investment Banking, and Global Wealth and Investment Management.
BAC has a market capitalization of $214.39B and employs over 200,000 people.
Company Fundamentals:
Unfortunately, I was not able to find the 10 year return on invested capital for BAC. And this is a problem that I have with many of the financial companies. However, I do have the 5 year average ROIC of 7.8% and last year’s ROIC of 7.51%.
Looking at the return on equity (which I use as a proxy for ROIC), the ROE has been steady. The 10 year average is 16.3% and the 5 year average is 17.31%. Last year’s ROE drops to 15.42%. Trending lower, but still decent return on equity.
Equity growth rates have been interesting. Over the 10 year period, the equity growth rate has been 9%. Over 5 years, it increases to 14.92% and last year’s rate was 17.32%. In 2004, BAC experienced a huge equity growth rate of 47.69% which does wonders for all the averages - especially the shorter ones.
Earning per share growth rate has had everything from large negative growth rate of -12%; two years of basically no growth at all, and 2 years with 25%+ EPS growth rate. Over the 10 years, the EPS growth rate has been 10.66%. Over 5 years, it improves to 13.27%. Last year’s EPS growth rate was 11.71%.
Sales growth rates have been trending upwards which is always good to see. The 9 year average is 14.67%, the 5 year average is 17.84%, the 3 year average is 21.53% and last year’s sales growth rate was 25.77%.
All in all, the company fundamentals look decent. Let’s check the dividend fundamentals.
Dividend Fundamentals:
As stated at the beginning, BAC has a very nice dividend yield of 4.64%. That handily beats the yield available from the S&P 500 Index and the DJIA.
Not only is this a very high yield by our standards, but BAC has also maintained excellent dividend growth over the last 10 years. The 9 year average dividend growth rate is 13.15%. The 5 year average is consistent at 14.04%. Last year’s dividend growth rate dropped to 11.58% but is still excellent. Remember that a dividend that grows at 15% will double every 5 years!
As for the dividend payout ratio, it has been climbing from a low of 32.85% to today’s high of 46.29%. This is not unmanageably high by any means. Management still has some room to maneuver in order to keep dividends increasing.
And cash flow growth rate has been 8.16% over the last 10 years. And it increases to 11.2% over the last 5 years. So decent cash flow growth to keep up with the dividends.
Valuation Models:
I use 3 valuation models when determining a fair price.
First off, from a dividend yield perspective, BAC is currently sitting right at the high end of the yield curve. The 5 year average high dividend yield is 4.6%. At a current yield of 4.64%, that means that the stock is trading at a slight discount. My model price is $48.70 which delivers a dividend yield of 4.6%. That means that a discount of 0.8% currently exists. Basically, the stock is trading at its fair price today.
Even Benjamin Graham would agree with us! The Graham number works out to $56.28 which implies a discount of 14.17%! And let me tell you, it is hard to find stocks that trade at a discount using the Graham number.
For my discounted present value model, I used the following inputs:
- future P/E of 10.19 (that is the current P/E and is at a historical low)
- future EPS growth rate of 7.7% (I had estimated an EPS growth rate of 9% from the historical equity growth rates, but the analysts have forecast 7.7% which is more conservative than my initial estimate).
- dividend yield of 4.6%
- future dividend growth rate of 11.58% (last year’s dividend growth rate which is lower than the 9 year and 5 year historical averages)
With these inputs, my model price is $51.27. Well, this price doesn’t make sense since I demand a dividend yield of 4.6% and that implies a price of $48.70. But this still shows that the stock is trading at a fair value.
Check my calculations for BAC.
Here is the 1 year stock price chart:
This stock has been declining since it peaked back in November giving us an opportunity to buy it at a fair price.
Conclusion:
All my valuation methods have this stock trading at a fair price today. The company fundamentals look good. Management has a great trade record for increasing dividends.
What are your opinions on BAC?
Full Disclosure: At the time of this writing, I do not own any shares in BAC.
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on July 24th, 2007 at 2:09 pm
I wonder if its wise to calculate a fair price for financial institutions without taking into account a longer view than 10 years. The last time banks had a crisis, was in the early 90s (if I remember correctly) with general recession and bad South American loans. With a likely recession on the horizon and the subprime mortgage problems, we may just have a repeat of those early 90s days. If we calculate nos using data from the last 10 yrs only, we may, more likely be looking at value traps. Just my thoughts
on July 25th, 2007 at 2:25 pm
I have been wanting to buy BAC for a couple of months now. To my delight, it has been going down for a little while. I was going to wait for it to start back up then buy, but today they announced a dividend increase to 64 cents. Over 14 percent increase! I believe it is likely that BAC will continue to go down for a few days, but I decided to buy. With a dividend of 5.4 percent, I feel I’d be a fool not too. This increase could cause the downward momentum to reverse. My guess this is exactly why the company announced the increase, to stop a sliding stock price. Anyways, I have been wanting to buy BAC at a good price, and $47.34 is a good price. Rule #4 (of my own rules) Don’t time the market!
It will probably go down some more, hopefully I can buy some more. But I don’t think it will go down too much more. Besides, I plan to hold BAC for a long time. It will have it’s ups and downs, just keep paying me my (5.4% and increasing) dividends.
on July 26th, 2007 at 1:29 am
I think this might not be such a bad stock but would watch for any future dips to buy.
I’m just interested to see what happens with the whole sub-prime interest loans and which banks will be affected. It might just present a good buying opportunity.
on July 28th, 2007 at 12:09 am
just raised div. by 14% to yield 5.4%
on July 31st, 2007 at 3:09 pm
I am trying to Calculate the discount present value of BAC. You came up with a number of $51.27. Could you please show the calculations or the formula used.
Thank you
George K
on August 1st, 2007 at 12:49 am
[…] A nice analysis of Bank Of America (BAC) has been put together over at Dividends Matter. […]
on August 2nd, 2007 at 11:17 am
While you were on vacation I left you an e-mail concerning BAC. I did the discount present value using the same future price that you had calculated $101 at a discount rate of 10.4 (15% - 4.6 High div) and obtained a present stock price of $37.75. Could you tell me what I am doing wrong please or show me the calculations so that I can redo the number.
Thank you,
george K
on August 3rd, 2007 at 3:15 pm
Very interesting breakdown of BAC. The company certainly is solid and has a terrific dividend yield, which makes it very attractive. The current credit problems continue to hurt banks, but this company is a good one for the long haul.
on September 12th, 2007 at 4:02 am
[…] drop in the market, Bank of America may become a real bargain. Dividends Matter has a thorough analysis on Bank of America (it is a great blog as […]
on September 12th, 2007 at 1:19 pm
I notice that on many of your evaluations of companies you state that you could not find the ROIC (Return on Invested Capital). Why not just calculate it.
Operating Income - Taxes
ROIC = _____________________________________
Total Assets - Current Liab + ST Debt
on June 29th, 2008 at 8:38 am
Doing my DD on BAC. I noticed there have been no posts in some time to this article…. Obiviously, looking at it now, FV then and current value now (~$25) can’t be sitting well with last year’s investors. What I am concerned about is that I see a EPS of $2.373 and a dividend of $2.56 (10%+ current yield). Paying a higher dividend per share than earnings per share can’t be sustainable. According to Zacks, last year’s EPS was $2.41. With over 25 years of dividend growth BAC leadership obviously knows the importance of dividends to its shareholders. Other financials have recently slashed dividneds. Speculation is that Citi is next. Anyway, what am I missing here? How can EPS be less than dividends per share? And, any thoughts on BAC cutting dividends?