Dividend Stocks

Bank of America Is Worth More Based on Its Dividend Hike and Buybacks

Bank of America (NYSE:BAC) is worth considerably more than its present price. In fact, my view is that it’s worth somewhere between 15% and 50% more from its Jul. 7 close. That means BAC stock should trade between $45.65 and $59.63 per share. The average between these two is $52.64 per share, or about 32% more.

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This is based on the recent announcement that Bank of America will increase its dividend by 17% to 21 cents per share. It’s also based on the CEO’s statement that the company would buy back $25 billion of its stock “over time.”

So, here’s how I came up with these target prices for BAC stock.

Using Dividend Yield to Value BAC Stock

Right now, Bank of America pays a quarterly dividend of 18 cents per quarter. That implies an annual dividend of 72 cents per share. Using its recent Jul. 7 price of $39.75, BAC stock has a dividend yield of 1.81%.

However, now with a 21 cents per share dividend starting in the third quarter of 2021, BAC will have an annual dividend yield of 2.11%. Here’s the thing, though; Bank of America’s historical yield over the past five years is 1.84%, according to Seeking Alpha.

Now, we can estimate its value using that historical dividend yield metric. For example, if we divide the 84 cents annual dividend starting in Q3 by the historical 1.84% dividend yield, the target price is $45.65. That implies a potential 14.8% upside for BAC stock over its Jul. 7 price of $39.75.

Moreover, we can project this out further. In one year, it’s also highly likely that Bank of America will raise its dividend once again.

Using Buybacks to Value the Stock

Adding to my case is the fact that Bank of America’s CEO, Brian Moynihan, also said the bank would repurchase some $25 billion of its stock over time. Moynihan did not say this would be over the next year, but I think that will likely be the case.

One reason I believe this is because, for the year ending March 2020, Bank of America spent $28.24 billion on repurchases. This can be seen in Seeking Alpha‘s analysis of the bank’s last 12 months (LTM) cash flow statements. In fact, for the year ending Dec. 2019, Bank of America spent $28.14 billion in share repurchases.

Let’s think about that for a minute. Currently, BAC stock has a market capitalization of $331.6 billion. So, if the bank does go ahead and buy back $25 billion of its stock over the next year, that represents 7.5% of its market cap. In other words, the buyback yield is 7.5%.

Normally, a good value for a buyback yield is 5%. In other words, if we divide $25 billion by 5%, the target market cap for Bank of America is $500 billion. That represents a potential gain of $168.3 billion from today’s market cap. This is also an upside potential of some 50% over the Jul. 7 price, or $59.62 (i.e., 1.50 x $39.75).

What to Do with BAC Stock

So, now we have two ways of valuing BAC stock. Using historical dividend yield, it should reach $45.65 within the next year. In addition, using buyback yield, the stock should be valued at nearly $60. The average of the two is around $52, or 32% over the Jul. 7 price.

Analysts tend to agree with me, although their average target prices are not as high. For example, Seeking Alpha indicates that 25 analysts have an average price target of $43.65 for the next 12 months. In addition, TipRanks reports that 13 analysts have an average target price of $44.81. That represents a 13% potential gain. This is also true of Yahoo! Finance. Their survey shows an average price target of $43.71 for 24 analysts.

I also suspect that many of these analysts may not have updated their targets yet to be in-line with the company’s latest announcements. In any case, I think there’s a fair chance that BAC stock will rise at least 32% to around $52 over the next year.

On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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