Bank of America: Perpetually Undervalued

12/31/2015 7:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

This leading bank remains among the easiest stocks I can recommend; that’s because it is perpetually undervalued and has more upside for its dividend than just about any stock I can name, argues Briton Ryle, editor of The Wealth Advisory.

From a valuation standpoint, Bank of America (BAC) has made huge improvements to put itself ahead of the pack. It’s inching towards closing the gap to book value even as book value increases, now sporting a 0.8 price-to-book ratio and a book value of $22.44.

Also, it has a forward P/E of 11.3 compared to an average of 18.5 for the S&P 500. On top of that, once the Fed’s stress test results are released in March of next year, the dividend should be at least 50% higher.

But, just in case all that wasn’t enough, banks are expected to make even more money when interest rates rise, which is inevitable.

In fact, just this past month, we saw all of the financials start to rally as the promise of a rate hike in the near future became more concrete than ever.

So, that makes the downside here quite limited. Bank of America posted stellar earnings in the most recent quarter. It netted $0.37 a share on $20.8 billion in revenue and beat estimates by a solid 12%.

All but one analyst following the stock have revised expectations upward after the latest earnings report and BofA is now expected to earn around $1.44 a share this year and $1.57 next year. 

The bank’s best hope of continuing to beat these estimates is through cost cutting. BofA may not have a ton of upside (~15% or so this coming year), but again, it also has very limited downside.

Also, BofA recently settled the litigations related to allegations of misleading shareholders about the extent of the bank’s exposure to mortgage-backed securities in 2009 and 2010.

It will pay a total of $335 million, an amount the bank had already set aside as of June 30. All in all, a slap on the wrist and good thing to get behind it.

In March, I lowered my rating on Bank of America to buy because the stock is not as likely to trade much higher without a dividend hike.

But, I raised the 12-month price target to $24 in anticipation of continued solid execution and a coming dividend hike. Accumulating shares on dips is a good idea.

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