Bank of America: Still on Track?
05/28/2014 7:00 am EST
Unexpected accounting issues recently caused a setback in this banking giant; nevertheless, John Dessauer continues to see long-term opportunity. Here's the latest from John Dessauer's Outlook.
Bank of America (BAC) reported first quarter results that looked good. There was a small loss of $0.05 a share, but earnings from operations were $0.35 a share, well above last year’s $0.10 a share.
The stock moved higher after that news, but then fell sharply on news of a capital adjustment. The issue has to do with cumulative losses on structured notes at Merrill Lynch that matured or were redeemed before Bank of America bought Merrill.
This is all about very complicated Bank accounting and new, overly severe bank regulations including Dodd Frank. To its credit, Bank of America’s management found the mistake and took immediate action.
The effect of correcting the mistake is to reduce Bank of America’s tier-1 capital to $130.1 billion from $134.2 billion. That is still 9% of common equity, better than the 8.5% required under the latest international Basel committee rules.
Bank of America was planning on raising the dividend and allocating $4 billion for share buybacks. Both were immediately suspended following discovery of the error.
The share buyback plans are most likely gone for now. However, the dividend increase is still being pursued by management.
Bank of America earned more than $10 billion last year. The dividend proposal is for $1.68 billion. Bank of America has to resubmit its calculations for the Fed’s stress test. The dividend increase is likely to be in the resubmission.
The decline in the stock is an overreaction to an accounting issue. Bank of America is on track to deliver consistent growth in profits. My advice is to buy Bank of America below $16.
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