What happened?
I bought a 1/2 position in Bank of America Corporation (NYSE:BAC) last Friday prior to the earnings announcement for my Seeking Alpha marketplace service,The Winter Warrior Investor.This was due to my duediligence informing me the odds favored the bank beating on the top and bottom lines and experiencing a pop due to it trading near 52 week lows. That is exactly what occurred.
Bank of America topped consensus estimates on higher net interest income and strong consumer demand.
Key Slides
The bank experienced solid organic growth across all geographic and business segments.
Consumers remain strong, with growth up 12% year-to-date and coming in at $3.1 trillion year-over-year.
Third quarter highlights Per Bank of America.
Major upside opportunity
With BAC stock trading near its lows and fulfilling a double-bottom reversal pattern, the stock looks primed for a rally. Bank of America has sold off hard for the past year. The stock is down 27% from its 52 week high and 25% year to date. This has created a substantial buying opportunity for savvy investors, I’d say. It appears an initial breakout is underway. The stock looks technically solid here. Take a look the chart below.
The stock bounced off support and is now consolidating prior to the next leg higher, I surmise. Look, all the greatest long-term investors say pretty much the same thing when it comes to buying opportunities, only in differing terminology. Warren Buffett has the most famous buying opportunity quote:
"Be fearful when others are greedy and greedy when other are fearful."
You get the idea. Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. Often, investors sell out at the exact time they should be doubling down. An unjustified selloff based on macro factors often creates opportunities to buy stock in solid companies with sound prospects. I submit this is the case we have with Bank of America. The stock presents an excellent dividend growth and total return opportunity at present. Let me explain.
Strong growth in banking business
The trading arms of banks tend to rely on market volatility for increased profits. The issue is volatility levels were somewhat subdued for the period. Even so, Bank of America's Wealth & Investment Management division produced strong results due to a strong banking business bolstered by revenue growth from banking products.
Dividend growth analysis
Bank of America has done an exceptional job growing the dividend over the past decade.
The dividend current stands at $0.84 annually and $0.21 per quarter, with a current yield of 2.32%.
The dividend consistency grade is an A-, according to Seeking Alpha’s scorecard. 22 years of payments, 8 years of growth.
I have no doubt Bank of America will continue the progress in this area. Furthermore, the bank is currently trading at a very attractive valuation. Let's review.
Valuation Analysis
Bank of America is on sale. The bank is currently trading at forward P/E ratio of 9.14. What’s more, the bank is trading for 1.14 times book value, which is $29.55 per share.
Furthermore, the stock is currently trading for 1.56 times tangible book value.
Comparing that to the 10-year historical median tangible book value of 1.9, this augurs well for an additional upside of 22%.
So, the bank still has plenty of room to run before concerns regarding valuation will come into play. Now for the bottom line.
The Bottom Line
The banks have begun to break out on current earnings. I submit the Fed's hawkish stance has marked the beginning of a rally for Bank of America. The combination of regulatory reform, a rising rate environment, accelerating loan growth, and the fintech revolution lowering costs should allow Bank of America to substantially increase the bottom line and therefore continue to raise the dividend substantially over the next decade. I posit this will, in turn, drive the stock higher creating an excellent total return opportunity.
Some of the "nattering nabobs of negativism" have reared their ugly heads and pointed to recessionary risks causing the bank's stock price to plummet, yet, I beg to differ. The increased income from NII should more than offset any consumer banking hit the bank may take. What's more, CEO Moynihan stated he wasn't concerned about a huge decline, and I'll take his word for it over the naysayers, as he has a rep of being a straight shooter. My 12-month price target is $43, implying a 24% capital gain coupled with continued dividend growth. Those are my thoughts on the matter. I look forward to reading yours.
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