Taking a chance on Bank of Amer­ica


Acquisition of lender’s shares could prove to be a good deal for those seek­ing both cap­i­tal ap­pre­ci­a­tion and div­i­dend growth

Co-ed­i­tors of Con­tra the Heard In­vest­ment Let­ter

With the mar­ket still in the throes of de­spair from 2008’s epic plunge, we ac­quired Bank of Amer­ica Corp. (BAC-NYSE) at a tally of US$6.76 in 2011. Very soon af­ter, War­ren Buf­fett an­nounced he was also a share­holder in the ven­er­a­ble in­sti­tu­tion. While we pur­chased the com­mon shares, the Or­a­cle of Omaha bought pre­ferreds and war­rants, which has worked out smartly for him. Our deal also ap­pears to be a ma­jor win, with the shares trad­ing around US$28 even af­ter a drop of more than 10 per cent dur­ing the re­cent mar­ket tu­mult. Of course, we did not in­vest US$5-bil­lion as the sage of value in­vest­ing did. Truth be told, our ac­counts sim­ply don’t hold that kind of lu­cre. Alas, nor will they to­mor­row.

One rea­son this in­vest­ment was a favourite of ours, and we ac­knowl­edge that the logic can be per­ceived as sim­plis­tic, is that this is the Bank of Amer­ica. Fail­ure with that ti­tle would have been a blow to Amer­ica’s ego. Be­ing the self-de­fined “great­est coun­try in the world” is of ma­jor im­por­tance to our neigh­bours and if your name­sake en­ter­prise (es­tab­lished in 1874) top­ples, that would be a de­fin­i­tive chink in the ar­mour.

When our pro­cure­ment of the stock was made, the div­i­dend was a pal­try penny a quar­ter. It was easy to be con­fi­dent that if the bank re­cov­ered, that to­ken would in­crease. It has risen – four times – to the cur­rent pay­out of 15 US cents a quar­ter. Be­fore the 2008 blowout, the quar­terly div­i­dend was 64 US cents and while that is un­likely to be achieved again, given that the share count has more than dou­bled in the past decade, fur­ther es­ca­la­tions are likely.

From this an­gle, the U.S. econ­omy ap­pears to be head­ing into tur­bu­lent wa­ters.

The coun­try is stack­ing ma­jor­league debts on top of a gi­gan­tic pile that it can ill-af­ford, es­pe­cially with in­ter­est rates nudg­ing up. While the rich get richer, a huge swath of the pop­u­lace is not get­ting ahead or is do­ing worse. In our minds, it is the peo­ple in the mid­dle class and to­ward the bot­tom who drive an econ­omy – when they gain dis­pos­able in­come, they tend to spend it.

Plus, the U.S. bank­ing sys­tem seems to face ma­jor chal­lenges every cou­ple of decades or so. Cer­tainly, some of it is be­cause of re­ces­sions, but much of the dam­age is in­ter­nally in­flicted as higher re­turns are chased dur­ing the go-go times. That of­ten turns out to be a mis­take.

Ul­ti­mately, when the econ­omy does turns south, banks will have their prob­lems. Bank of Amer­ica will not be im­mune, but if Brian Moyni­han con­tin­ues to guide the ship, his stew­ard­ship should di­min­ish the dam­age. He has been chief ex­ec­u­tive since 2010 and chair since 2014; at 58 years of age, he should have some mileage left in his ca­reer. Of course, whether he chooses to spend many more of them at the bank is an open ques­tion.

The re­cent quar­terly results were ex­cel­lent. Net in­come rose 32 per cent to US$7.2-bil­lion, loans were up 6 per cent and de­posits 4 per cent. Mer­rill Edge, the bank’s dis­count-bro­ker sub­sidiary, saw as­sets jump 22 per cent past the US$200-bil­lion mark.

Al­though our gain thus far of 322 per cent is huge, our ini­tial sell tar­get on Bank of Amer­ica is US$38.74. That pro­jects a fur­ther up­side of 36 per cent. If we are cor­rect, and of course there is no guar­an­tee, that will be sweet es­pe­cially if it oc­curs in the next few years.

Throw on top fur­ther div­i­dend hikes, and like whip­ping cream atop a thick cho­co­late shake, this could prove to be a savoury deal for in­vestors seek­ing both cap­i­tal ap­pre­ci­a­tion and div­i­dend growth.



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