Last update on 2024-06-27

Bank of America (BAC) - Dividend Analysis (Final Score: 5/8)

In-depth dividend analysis of Bank of America (BAC) with an 8-criteria scoring system. Final score 5/8. Performance and stability insights for 2023.

Short Analysis - Dividend Score: 5

We're running Bank of America (BAC) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Bank of America's (BAC) dividend policy shows mixed performance based on an 8-criteria scoring system. The dividend yield is below the industry average at 2.7324%. The historical average annual growth rate has been erratic but shows some recent improvement. The average payout ratio is healthy at 36.82%, and dividends are generally well-covered by earnings. However, cash flow coverage of dividends has been inconsistent. The stability of dividends took a severe hit during the 2008 financial crisis, but has been stable post-2014. BAC has a long history of paying dividends for over 25 years and has engaged in regular stock repurchases, reinforcing shareholder value.

Insights for Value Investors Seeking Stable Income

Investors should approach BAC with cautious optimism. While there are positive signs like a stable post-2014 dividend payout, a healthy payout ratio, and regular stock repurchases, the erratic historical performance and vulnerability to economic downturns should not be ignored. It may be worth considering as part of a diversified investment portfolio, but investors prioritizing high and stable dividends should be cautious.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield compares the annual dividends paid by a company to its stock price.

The current dividend yield of Bank of America (BAC) stands at 2.7324%. This is lower than the industry average of 3.24%. Examining historical data, BAC's dividend yield peaked dramatically at 15.9091% in 2008, reflecting a severe stock price drop amid the financial crisis. Post-2009, yields have generally remained below the industry average, although the consistency has improved. Currently, with a closing stock price of $33.67 and a dividend per share of $0.92, the yield shows moderate growth compared to the past few years. This trend indicates a stabilizing yet modest return for income-focused investors. As the current yield is below the industry average, it might be less attractive for those prioritizing immediate income.

Average annual Growth Rate higher than 5% in the last 20 years?

Explain the criterion for Bank of America (BAC) and why it is important to consider

The criterion requires examining whether Bank of America's dividend growth rate has consistently been above 5% over the last 20 years. A higher dividend growth rate usually signifies a stable and growing company, which is reassuring for investors looking for income as well as capital appreciation.\nAnalyzing the Dividend Ratio provided, we notice that while the average dividend ratio stands at approximately 19.56%, its trajectory has been highly erratic. Calculating the annual growth rates, some years, particularly 2008-2012, experienced zero or negative dividends per share, dragging down the overall growth. However, the dividend ratios in recent years between 2020-2023 are modestly above 5%, indicating improved company performance lately. Hence, while the long-term average growth suggests overall positive performance, the inconsistency highlights periods of financial distress, specifically around the 2008 financial crisis. Therefore, BAC hasn't achieved a stable >5% dividend growth consistently, conditioning the overall evaluation to be mixed but with recent positive trends.

Average annual Payout Ratio lower than 65% in the last 20 years?

A payout ratio below 65% over an extended period is important because it indicates that the company is retaining enough earnings to reinvest in growth, pay off debt, or handle unexpected expenses.

Bank of America's average payout ratio over the past 20 years is approximately 36.82%, which is well below the 65% threshold. Most years fall below this threshold, with the exception of 2007 and 2008, where the ratios were 71.77% and 257.80%, respectively. These high payout ratios during the financial crisis were anomalies as the bank aimed to maintain shareholder trust in turbulent times. Post-crisis, the payout ratio stabilized well below 65%, indicating a good retention of earnings for future growth, debt repayment, and other strategic uses. Thus, the trend is positive, showing responsible dividend policy and financial management.

Dividends Well Covered by Earnings?

This criterion evaluates if the company's earnings are sufficient to cover its dividend payments. A higher ratio indicates healthier dividends.

The Earnings per Share (EPS) of Bank of America has shown significant fluctuations from 2003 to 2023. The ratio of dividends covered by earnings or payout ratio has occasionally been below the preferred benchmark of 1.0 (100%). Specifically, during financial distress in 2009 and disruptions in 2010, the EPS was negative, indicating dividends were unsustainable. Notably, low ratios of 0.04 in 2013 and 0.25 in 2016 signal resilience. Typically, a ratio above 0.5 (50%) is considered financially prudent, reinforcing that in recent years the EPS strengthening to 0.72 in 2023 supports a sustainable dividend outlook. Generally, with gradual earnings recovery in recent years, the improving trend in the ratio is positive, indicating a favorable dividend cover.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow indicate a company's ability to sustain dividend payouts even during turbulent times. It is crucial for financial health and investor confidence.

Bank of America's free cashflow has shown significant volatility from 2003 to 2023, ranging from a high of $127.49 billion in 2009 to negative values in some years, including 2020 and 2022. On the other hand, dividend payout amounts have been relatively stable over the same period, primarily showing an increasing trend. A critical assessment of the 'Dividend covered by Cashflow' ratio elucidates that for several years, particularly in 2004-2005, 2009-2014, and recently in 2020-2022, the ratio is poorly covered, often dipping into negative territory. This signifies periods when the company was potentially paying dividends out of reserves or borrowing, which is not an ideal scenario for long-term sustainability. However, in years where the cash flow was positive, BAC demonstrated good coverage, especially notable in 2007 and during post-2016 recovery years. While the overall trend reveals inconsistency, the latest data showing a ratio of 0.202 in 2023 suggests improved but still cautious optimism for dividend reliability. The erratic numbers emphasize the need for investors to tread carefully, keeping an eye on how well future dividends are covered by evolving cash flows, as sustainable dividends contribute significantly to investor confidence and stock valuation.

Stable Dividends Since the Company Began Paying Dividends?

Stable dividends over the past 20 years are critical for income-seeking investors, indicating a reliable income stream.

Analyzing the dividend data for Bank of America (BAC) over the past 20 years, we observe a significant drop in dividend per share from $2.24 in 2008 to $0.04 in 2009, representing a decrease of over 98%. This plunge occurred amidst the global financial crisis, demonstrating the vulnerability of BAC's dividends to economic downturns. Post-crisis, the company's dividend payments have shown gradual improvement and stabilization. However, the stark drop in 2009 would be concerning for income-seeking investors who prioritize dividend stability. Since the criteria question specifically mentions drops by over 20%, the key year here is 2009, where you observe a dramatic decrease far exceeding 20%, which is not favorable.

Dividends Paid for Over 25 Years?

Dividends Paid for Over 25 Years evaluates the consistency and reliability of a company's dividend payments over a long period, indicating financial stability and shareholder value.

Bank of America (BAC) has shown a long history of paying dividends, as evidenced by the data from 1998 to 2023. However, it's necessary to note that around the financial crisis period in 2008-2009, dividends per share dropped sharply from $2.24 in 2008 to just $0.04 in 2009 and maintained minimal levels until 2014. This drop reflects the impact of the financial crisis, which led to significant constraints on the banking sector. Although dividends were significantly cut, since 2014, we can observe a gradual recovery and progressive increase in dividend payouts, from $0.04 in 2013 to $0.92 in 2023. The overall trend post-2014 is positive, indicating recovery and renewed commitment to delivering shareholder value through dividends. However, this historical dip highlights risk sensitivity, making it essential for investors to consider potential economic influences on long-term dividend payments.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases indicate the company's commitment to returning value to shareholders and can be a sign of financial stability. It is important for investors looking for long-term value.

When analyzing Bank of America's stock repurchase trends over the last 20 years, it becomes apparent that the company has shown a fair degree of reliability and commitment. From the data, we observe significant buybacks during several distinct periods including 2007, 2014, 2016, 2017, 2018, 2019, 2020, 2021, 2022, and 2023. Particularly, recent years have seen substantial share buybacks, with the number of shares reduced from over 11 billion in 2013 to approximately 8 billion in 2023. The average rate of repurchase is 6.1484%, which suggests a deliberate effort by Bank of America to maintain or increase shareholder value. Despite fluctuations during periods of economic uncertainty, especially highlighted during the financial crisis of 2008-2009 and the 2008-2009 downturn when shares significantly increased (from approximately 2.4 billion in 2008 to over 7.6 billion in the subsequent years), the long-term trend is positive. This demonstrates a resilient strategy with the intent to stabilize and enhance shareholder equity. Overall, the trend is favorable and marks a commendable effort by BAC to uphold strong financial practices.