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Buying Back Stock May Help Rebuild the Credibility
Posted by: Victor Selva (IP Logged)
Date: March 25, 2014 10:28PM
Bank of America Corporation (BAC) is a bank and financial holding company. Through its banking and various nonbanking subsidiaries throughout the U.S. and in international markets, the company provides a range of banking and nonbanking financial services and products through five business segments: Consumer & Business Banking, Consumer Real Estate Services, Global Banking, Global Markets and Global Wealth & Investment Management, as well as All Other.
In Mar 2013, following the approval by the FED, the bank announced to buy back as much as $5 billion in stock. This way credibility will be improving. Bank of America CEO Brian Moynihan said “Buying back common shares is the best way to continue to drive value for our shareholders”. As of Dec 31, it reported Basel 1 Tier 1 common capital of $145 billion, and ratio of 11.19%. Its estimated Basel III Tier 1 common ratio stood at 9.96%. All the numbers showed that were well above the regulatory requirements On the other hand, JPMorgan (JPM) reported Basel I Tier 1 common capital of $149 billion, and ratio of 10.7% and estimated Basel III Tier 1 common ratio of 9.5%, while Wells Fargo (WFC) reported Tier 1 common equity ratio under Basel I of 10.82%and common equity Tier 1 ratio under Basel III off 9.78%.
Project New BAC
In 2011, Bank of America launched an initiative called Project New BAC. The idea was simple; eliminate unproductive spending with a goal to improve earnings. Its focus on core services and on cost cutting, expecting total cost savings to reach $8 billion per year by mid-2015. The bank has reduced expenses considerably, about $900 million of cost savings in 2012 and $6billion in 2013. Moreover, operating expenses also declined 4.0% year-over-year to $69.2 billion in 2013. CEO Brian Moynihan detailed the five main aspects targeted by Project New BAC: "capital generation, reducing our costs, managing the risk down, addressing the legacy issues, and driving business growth overall."
P/E, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 19.5x, trading at a discount compared to the industry. Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago. Bank of America´s fourth-quarter earnings surpassed the Zacks Consensus Estimate. Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. Let´s compare the current ratio with the peer group in the next table:
As outlined in this article, the bank impressed investors with its performance in Q4 as well as full-year 2013. Moreover, Project New BAC is expected to take the company to even greater heights in the coming years. Finally, raising capital makes me feel bullish about this company’s future profitability.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Paul Tudor Jones (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Glenn Greenberg (Trades, Portfolio), Richard Snow (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Brian Rogers (Trades, Portfolio), George Soros (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have also invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: Bill Nygren: Current Portfolio, Stock Picks
George Soros: Current Portfolio, Stock Picks
Stocks Discussed: BAC, WFC, JPM, BKU, BBT,
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