Why the Time to Bank on Bank of America Stock Will Soon Arrive

Dividend Stocks

Long-term Bank of America (NYSE:BAC) bulls would like to forget 2018. BAC climbed by more than 150% in 2016-2017. However, in 2018 it failed to sustain any lasting gains and ended the year more than 25% below its 52-week high.

Higher interest rates, an inverting yield curve, and concerns about a slowdown may have spooked investors. However, once the overall market regains its footing, BAC stock should provide investors with a lucrative opportunity.

BAC stock and most banking-sector stocks did poorly in 2018. The shares of other major banks such as  Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM) dropped by similar amounts as BAC. Still, that offers little comfort to long-term BofA bulls who were hit with the large decline in BAC stock. The slump came despite the bank’s dramatically increased profits, which were bolstered by both a corporate income tax cut and higher interest rates.

Warren Buffett Continues to Buy BAC Stock

However, even in this environment of equity declines, BAC stock has earned an implicit endorsement from Warren Buffett. BAC has become the second-largest holding in the Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) portfolio, trailing only Apple (NASDAQ:AAPL).

One might also assume that BAC has become Buffett’s favorite bank. During the third quarter of 2018, Buffett purchased $13 billion in bank stocks, including $6 billion of BAC stock. Buffett now has more money in BAC than in his previous favorite bank stock, Wells Fargo (NYSE:WFC). He also stated in an interview last October that he expected to hold BAC “for a long, long time.”

Bank of America’s Fundamentals Have Become Too Attractive to Ignore

While I would caution against jumping into Bank of America simply because Buffett likes it, the bank’s fundamentals indicate that other investors should follow his lead, since the shares’ forward price-earnings ratio has fallen to about 8.5. That is also well below BAC’s average multiple of 18.9 over the last five years.

While price-earnings multiples under ten often indicate that the company has poor growth prospects, this is not the case with Bank of America.  According to analysts’ average estimate, the bank’s profit will grow 11.9% in 2019 . Moreover, they expect the double-digit earnings growth to continue through at least 2021.

Also, starting five years ago, Bank of America resumed its tradition of annual dividend increases. Current owners of Bank of America stock receive an annual payout of 60 cents per year, equaling a yield of just under 2.5%. Barring another financial crisis, I expect the bank’s dividend to continue to grow.

The only negative aspect of Bank of America stock is its close correlation with the S&P 500. I do not expect BAC  to escape this trend in the near-term. For this reason, I am not bullish in the very short-term. However, I think that once the broader indexes stop declining, it will again be a good time to buy BAC.

The Bottom Line on BAC Stock

Bank of America stock will likely recover once the S&P 500 stops declining. Bank of America stock suffered in 2018 as fears of a slowdown overshadowed tailwinds that lifted the company’s profits.

However, as Wall Street sold off BAC stock, investors such as Warren Buffett increased their stakes in bank stocks, including Bank of America. Moreover, while stocks can often maintain low price-earnings ratios for years, BAC’s double-digit profit growth should bolster the stock over time. Also, even if the equity languishes in the near-term, investors can benefit from the 60-cent per share annual dividend that appears poised to rise going forward.

BAC stock has failed to escape the downtrend that has lowered most stocks in the S&P 500. However, once investors resume buying stocks, investors besides Mr. Buffett will want to hold BAC stock for a long, long time.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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