Best Bank Bests? BAC and Citi

08/16/2017 2:52 am EST

Focus: FINANCIALS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

For more than a decade, banks have built up earnings and improved balance sheets. Banks now have plenty of capital and have overhauled their balance sheets, says Marshall Hargrave, editor of Wyatt Research's Daily Profit.


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U.S. banks may also benefit from reduced regulation. The Trump administration plans to ease a wide range of regulations imposed on financial institutions.

All this should help unleash pent-up demand from investors — finally giving them a reason to buy back into big banks. With that in mind, consider these two big bank stocks to own today:

Bank of America (BAC) is chalking up some big positives. For starters, Warren Buffett’s Berkshire Hathaway (BRK.B) is set to become Bank of America’s largest shareholder. That’s a vote of confidence that any company would want. Berkshire will now own 7% of Bank of America.

Bank of America gained approval this month to increase its dividend to $0.48 share — a 60% boost. This is a big reason Buffett is swapping his preferred shares for ordinary shares, as the dividend will now pay more than the preferred dividend.

Also, the bank received regulatory approval to buy back $12.9 billion in stock. This is second year in a row that Bank of America has upped its both its dividend and its buyback.

Buffett is trading in his preferred shares to capture some of the upside from gains that Bank of America will see from rising interest rates and the improved banking environment.

Citigroup (C) is one of the most undervalued big banks. Shares still trade at just 90% of book value. But compared to other banks, it carries reduced leverage and still pays a 1.2% dividend yield.

Citigroup underwent a huge restructuring that commenced after the financial crisis. With restructuring now complete, the company is seeing the benefits from improved efficiencies.

Citigroup is more diversified than other banks when it comes to having exposure to high-growth emerging markets. Citigroup has a strong presence in growing markets, including China.

And, with Citigroup’s largely improved balance sheet, it carries a lower debt-to-equity ratio than banks like JPMorgan Chase (JPM) and Wells Fargo (WFC).

Bank of America and Citi are two of the most capable companies in the industry when it comes to rewarding shareholders, making them bank stocks to own now. Both have underrated dividend yields, and each is poised to gain in an environment of higher interest rates.

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