Bank of America’s dividend lags its peers, but that could change soon
Bank of America (NYSE: BAC), the second largest bank in the United States in terms of assets, has achieved a lot in the past year. It survived a global pandemic and performed well despite an intense economic downturn and an environment of extremely low interest rates. He also received a big nod from legendary investor Warren Buffett: Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) bought more than $ 2 billion in bank shares, even though she eliminated or reduced most of the other bank holdings in her portfolio.
Despite all this, its dividend payouts are lower than those of its big rival banks. But given that his performance is now at the top of his peer group, I think that may change soon.
To see how a bit short Bank of America’s payouts have been, let’s first take a look at the most common metric that investors use to rate them: dividend yield. It is simply the sum of the annual dividend payments divided by the company’s stock price. Below, I’ve taken each bank’s total dividend payments from 2020 and divided by its closing share price on Friday.
Source: Bank financial statements
At 1.9%, Bank of America’s return tracks them all. Plus, it’s slightly lower than the banking industry’s average dividend yield, which is currently just over 2%, according to S&P Global Market Intelligence.
Image Source: Bank of America
Dividend payout ratio
One can also look at a company’s dividend payout ratio – the percentage of its profits that a company allocates to dividends on an annual basis.
|Bank||Payment of dividends
|2019 dividend payout ratio|
|Bank of America||38.5%||24%|
Source: Bank financial statements
Bank of America had the smallest dividend payout ratio in 2019 and 2020. Ratios last year were high as profits were hit due to the pandemic. Banks tend to be a bit more conservative than average with their dividend payout ratios. In some other industries, it would not be uncommon to find payout ratios ranging from 50% to 70%. But the big banks have also used part of their profits to buy back billions of dollars of their own stock in recent years.
The other consideration with regard to bank dividends relates specifically to their regulatory capital requirements. A bank must maintain a certain amount of capital relative to its risk-weighted assets, so even if it has to absorb large unexpected loan losses, it will still be able to lend in the event of an economic downturn.
For this reason, the ability of banks to pay dividends and repurchase shares is limited by regulators. A measure of capital to risk-weighted assets is the capital ratio of Class 1 Common Shares (CET1). If a bank falls below its minimum CET1, it can still return capital to shareholders, but its return may be limited. Banks therefore try to avoid approaching this threshold, unless they are absolutely obliged to do so.
|CET1 ratio required||Excess capital|
|JPMorgan Chase||13.1%||11.3%||~ $ 31 billion|
|Bank of America||11.9%||9.5%||~ $ 36 billion|
|Citigroup||11.73%||ten%||~ $ 21 billion|
|Wells fargo||11.6%||9%||~ $ 31 billion|
Source: Bank financial statements and income statements
As you can see above, the Big Four US banks have a ton of excess capital above their required minimum CET1 ratios. And normally, this excess capital will not be depleted as banks typically make capital distributions from their profits quarterly. The remaining profits are essentially added to the excess capital cushion. Even so, Bank of America’s $ 36 billion in excess capital is a huge amount and far more than other banks.
Catch up with the competition
As Bank of America has said before, it doesn’t have a lot of money to spend all its excess capital. It cannot buy another depository institution because US law prohibits any bank from buying to hold more than 10% of all US deposits. In other words, two institutions cannot combine if the post-merger bank will hold more than 10% of these deposits.
It turns out that Bank of America already done hold over 10% of all US deposits – but he became that status organically, and his other major acquisitions since he did involve institutions that federal regulations did not consider “banks.”
Bank of America will therefore continue to grow organically and invest in its operations, but these expenses can only reduce its excess capital by as much.
And yes, it will probably repurchase tens of billions of dollars of its stock in the next few years, but the other big banks will too. Bank of America is also arguably the best placed among its peers to return capital to shareholders. Not only does it have the most excess capital, but it doesn’t address any potential issues when it comes to the additional leverage ratio. like JPMorgan. It also doesn’t deal with heavy regulatory issues that require major investments to fix, like Wells Fargo and Citigroup do.
This is why I would expect Bank of America management to want to increase its dividend until it is more in line with its peers – or even increase its yield until it exceeds the theirs, because that’s another way to stand out. And if you’re an institution with $ 36 billion in excess capital and you’re somewhat limited in terms of the means to deploy it, why not start by being more aggressive with your dividend?
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