Learning from Painful Mistakes
Despite significant efforts, Bank of America’s share price and dividend have yet to fully recover even after 15 years. Nevertheless, one could argue that the detrimental event that decimated shareholder value served as a valuable lesson for the bank.
Today, banks are obligated to maintain a minimum Tier 1 Capital Ratio to prevent reckless risk-taking for the sake of short-term profits. Bank of America comfortably exceeds this requirement, boasting a Tier 1 Capital Ratio of 11.8%—181 basis points above the regulatory minimum. This bodes well for stability-seeking investors, particularly in the face of potential economic downturns.
A Well-Funded and Growing Dividend
Taking a fresh perspective, Bank of America’s dividend growth since its reinstatement showcases a positive trajectory. Management has consistently increased the dividend for ten consecutive years, with the payout amounting to just a quarter of the company’s bottom-line earnings. Currently, investors can enjoy a 3% starting dividend yield, which is further augmented by an approximate 7% growth rate.
While no dividend is entirely risk-free, Bank of America weathered the COVID-19 pandemic without exceeding a 44% payout ratio—a testament to its resilience.
Interest Rates Stabilizing
The financial sector experienced significant volatility as interest rates fluctuated over the past few years. In response to the pandemic, the Federal Open Market Committee (FOMC) reduced the federal funds rate to zero, leading to inflation spikes in 2021 and 2022. To counteract this, the FOMC initiated one of history’s quickest hiking cycles, raising the rate to over 5%.
Although future FOMC actions remain unknown, reduced inflation rates and a stable federal funds rate since the summer suggest unlikely prospects of extremely low rates. This scenario positions Bank of America favorably, anticipating a stable and relatively high-interest rate environment—a positive outcome for business and dividends.
While acknowledging the past, Bank of America has undergone significant improvements, rendering it a substantially healthier dividend stock compared to a decade ago. With a modest payout ratio and a steadfast commitment to rebuilding its dividend, the future looks promising. Additionally, the prospect of entering a period with stable interest rates enhances the investment experience for Bank of America shareholders.