By Jack Hough
Like a picnic besieged by yellow jackets, Bank of America's
financial results this year have shown appetizing particulars that
were nonetheless difficult for investors to fully enjoy.
The bank has slashed expenses, built a sturdy capital position,
and gradually shifted away from volatile businesses toward stable
and lucrative ones.
But it's also plagued by swarming litigation costs. They will
sting again in the third quarter but then quickly begin to clear
away. Starting next year, BofA investors will get a glimpse of two
things they haven't seen in years: a fairly clean income statement
and a decent dividend.
By 2017, earnings per share could hit $2, versus an estimated 75
cents this year. Shareholders by then will have seen a string of
steady increases in earnings and dividends, with fewer and smaller
legal surprises.
They could be willing to pay $25 a share by that point, or 12.5
times earnings, versus a recent $17. Add a buck per share in
cumulative dividends and BofA stock could return 50% over the next
three years, and perhaps sooner.
Bank of America is the second-largest U.S. bank by total assets,
with $2.17 trillion versus $2.52 trillion for J.P. Morgan Chase.
Few big banks have been hit harder by legal overhang from the
global financial crisis than BofA, where litigation has gobbled up
30% of core profit since 2013, double the average for peers.
In August, BofA reached a $17 billion settlement with the
Justice Department over mortgage lending, which will bring its
total legal tab since the financial crisis to well over $65
billion. Look for another messy report in mid-October, when the
bank releases third-quarter numbers.
The good news: BofA reckons it has resolved claims on 95% of
mortgage securities where claims have been filed or threatened.
Starting in the fourth quarter, profit statements could once again
begin to be dominated by, well, profits.
"There's a lot of talk about when earnings will get back to
normal," Chief Executive Brian Moynihan told Barron's recently.
"But we're already seeing rising profit in most of our core
businesses, offset by legacy costs."
In a note this month upgrading BofA shares to Buy from Neutral,
Goldman Sachs pointed out that, looking beyond litigation costs and
other one-time items, BofA has shown the largest reduction in
earnings volatility among its peers in recent years, and the
stablest trading revenues since 2013.
Better earnings stability and higher dividends have helped Wells
Fargo, for example, fetch a premium stock valuation of 1.7 times
this year's estimated book value, versus 0.8 times for BofA. As
steadier earnings for the latter begin to shine through, its
discount should narrow.
A bigger dividend should help. The Street predicts 55 cents a
share by 2017, or 3.2% of today's price.
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