Bank of America: Good Fundamentals and a Great Track Record for Increasing Dividends

In 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 dropped to 15.42%, which is trending lower, but is still a 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.

Its earning per share growth rate has had everything from a large negative growth rate of -12%, two years of basically no growth at all, and two years with a 25%+ EPS growth rate. Over the 10 years, the EPS growth rate has been 10.66%. Over 5 years, it improves to 13.27%, and last year’s EPS growth rate was 11.71%.

Its 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. Now, 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 both 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 this 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 Tuesday’s high of 46.29%. This is not unmanageably high by any means, and management still has some room to maneuver in order to keep dividends increasing.

The cash flow growth rate has been 8.16% over the last 10 years, and it increased to 11.2% over the last 5 years. So there is decent cash flow growth to keep up with the dividends.

Valuation Models:

I use three valuation models when determining a fair price.

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:

A future P/E of 10.19 (that is the current P/E and is at a historical low).

A 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).

A dividend yield of 4.6%.

A 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:

click to enlarge

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, and 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.

Comments

[rdial54]

Can't go too wrong with this giant.