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What Position Should Investors Take in Bank of America?

March 09, 2012 | About:
A well-informed investor is the one who considers both technical and fundamental analysis of a stock before deciding on what position to take on it. Whether you are looking to short the stock, take a long position on it either for the long term, short-term intermediate or speculative purposes, requires assessment of the stock yield, dividend history, profitability, payout ratio, cash flows, and upcoming developments and news releases. Bank of America Corporation (BAC) is the second largest U.S lender in terms of assets and a lot has been unfolding in recent times. Here, we assess the best course of action on this stock and prospective dividend yield for financial year2012.

Bank of America Dividend Yield LagsFar Behind the Industry Average

With a dividend yield of 0.50%, Bank of America looks unimpressive in this regard and many investors who consider this as their main item of assessment in making investment decisions would opt for other players in the industry. This represents a dividend of $0.04 per share for the last financial year. The forward annual yield replicates the same result, thereby indicating less promise for the prospective investors.

Historically, before the global financial crisis, Bank of America had one of the healthiest dividends, having grown it on a consistent basis since 1993. However, the company experienced adverse effects of Global financial crisis in full force resulting into a slump in profits. The company’s last report of profits came in the year 2008, with losses growing in 2010 to over $3 billion.

The company’s cash flows have been anything but impressive, with the only positive figure reported in 2009, albeit insignificant compared to the negative cash flow reports. This is yet another factor and indeed a very important one to consider when deciding on your investment strategies in Bank of America stock. Looking at the already discussed factors, the best decision will be perhaps shorting the stock. Nevertheless, the question is what happens if everyone goes for this strategy. Therefore, you still need to do more analysis on other factors.

The company’s dividend payout ratio of 400% is worrying and at the same time somewhat "impressive." How do you pay to your stockholders more than what you earned during the financial year? Well that can only mean, more and more debt being acquired to pay the stockholder dividends or perhaps the cash reserves is being utilized to meet this end. Either way, none of these would be good news for any investor looking to hold the share with the intention of selling it for capital gains.

The newsmakers on Bank of America

Recent events do not give confidence boosting information about Bank of America. The company’s withdrawal from issuance of mortgage loans to the government-owned Fannie Mae, pointing the disputed mortgage loan defaulters risk bearing responsibility as the main reason to this action.

While this may cause an instant negative impact to the performance of Bank of America stock, the long-term future could be the direct opposite. By discontinuing issuance of these high-risk loans, Bank of America reduces its risk of loss in mortgage loan repayments by defaulters, thereby consolidating the impact of low returns obtained as a result of loss of business.

Who are Bank of America prime competitors?

The company’s prime market competitors include Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC). Bank of America happens to trail the trio in most key performance measures including net income, earnings per share, and price to earnings growth ratio. The only area where Bank of America outperforms the rest is the quarterly year on year growth in revenues, having garnered a record 27%. This has also helped in making the company the second highest in terms of trailing 12 months revenues, which further prompts the question, why the squeeze in profits? This can only be attributable to the defaulting mortgage takers, whose failure to pay has resulted in many costs for Bank of America.

DecisionMatters,Demystified

Critically looking at the financial position of Bank of America, the company remains very healthy in terms of revenue generation justifying why, despite experiencing losses over the last few years, it continues to pay dividends to stockholders. This is a very positive course of action, which should at least reduce the amount of panic sales, thereby stabilizing the stock price, which brings us to the most realistic position to take for those holding the stock. While some may try looking for shortcuts in recouping their investments with some profits by short-selling Bank of America stock, this may not be the right strategy to employ. It will not be long before the company starts converting its revenues into earnings, which will bolster the dividend yield in the end.

However, for those who do not hold the stock as of now, short-selling might yet be a clever strategy to use provided that you do not hold the stock for more than a month before closing your position. This is typically because of the nature in which Bank of America stock has been fluctuating in recent statistics, and the contingent events that keep on unfolding month in and month out with a possibility of more twist and turns, which remain a glittering prospect for the company.

Dividend Yield based oncontingent events

The company’s dividend yield is therefore very reliant on the outcome of the pending contingent events masked by the Funnie Mae case. If the events turn out positively for Bank of America, for instance, if the mortgage defaults costs go to both two parties or entirely paid by Fannie Mae, then Bank of America could start sailing on tides only witnessed before the global financial crisis. This could result in a higher dividend yield for the company in the region of 3% to 4%. This could happen as soon as the curtains fall for the financial year 2012 or thereafter, but even a small indication of this could trigger an excellent performance by Bank of America stock.

About the author:

InvestmentUnderground
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