The financial world is full of opportunities that await those who are willing to search for and recognize hidden gems. One of the largest and most stable banks in the United States, with a broad range of services and a global footprint, offers investors attractive opportunities for long-term growth and stable dividend income. With a history dating back to the early 20th century and a continued innovative approach, this institution demonstrates its ability to grow and pay dividends.

This bank is not only a major player in retail and corporate banking, but also an important partner in investment banking and wealth management. Its stable financial position and long-term growth have attracted the attention not only of retail investors but also of financial giants such as Berkshire Hathaway, which holds a significant stake in the company.

Company introduction

Bank of America $BAC is one of the largest and most important financial institutions in the world. This American bank provides a wide range of financial services, including personal and business banking, investment banking, wealth and investment management, mortgages, loans and other financial products. The company is headquartered in Charlotte, North Carolina, but its reach is global, with branches and operations in more than 35 countries.

Bank of America's history dates back to 1904, when Amadeo Giannini founded the Bank of Italy in San Francisco to provide financial services to Italian immigrants who had difficulty obtaining credit from traditional banks. Bank of Italy later became Bank of America and grew steadily through acquisitions and expansion. An important milestone in the company's history was its merger with NationsBank in 1998, creating one of the largest banks in the world under the name Bank of America.

Bank of America is known for its strength in retail banking, offering services such as checking and savings accounts, credit cards, personal and mortgage loans. In corporate banking, it provides comprehensive financial services to companies of all sizes, including lending, capital advisory, and risk management. BoA also has a significant presence in investment banking and wealth management, where it provides services such as mergers and acquisitions, underwriting, and investment advisory services through its Merrill Lynch division.

As part of its growth strategy, Bank of America continually invests in technological innovation to improve the customer experience and increase the efficiency of its operations. Mobile banking and digital services are key areas where the bank sees potential for future expansion.

For dividend investors, Bank of America's stable dividend policy is particularly attractive. The bank pays regular dividends to its shareholders and often targets dividend growth, making it a popular choice for investors seeking stable dividend income. The stability and strength of Bank of America's financial position ensure that it is able to not only provide solid returns, but also withstand economic fluctuations and sustain long-term growth.

Buffett's favourite bank

Bank of America represents more than 10% of Berkshire Hathaway's investment portfolio, its second largest position after Apple.

Bank of America is a classic Buffett stock. It has a strong consumer-oriented business and plays a big role in the U.S. economy. It has a large amount of cash (one reason Buffett loves bank stocks) and diverse revenue streams from different business areas.

Buffett, who is always looking for undervalued stocks, invested in Bank of America after the 2011 financial crisis when the bank was struggling. Moreover, BofA stock may still be undervalued: it trades at a price to tangible book value of 1.6, lower than many similar banks.

Despite all of Bank of America's great characteristics, the stock is down 16% from its highs of the previous two years. Revenue and net income are down from a year ago, and return on tangible common equity (ROTCE) has fallen from 17.4% last year to 12.7% in the first quarter of 2024.

This was partly due to charges associated with the collapse of several banks last year. And part of it is related to higher interest rates.

All banks are now operating in a pressure-packed environment. Many companies are feeling the impact of inflation and high interest rates, but banks are feeling it particularly keenly because it directly affects their business. High interest rates mean fewer loans approved, higher default rates and higher interest paid on retail deposits.

There are positive elements, such as higher interest rates on loans. But a tight economy means less money in circulation, and that is the heart of the banking business. That's exactly the point of the Federal Reserve's monetary policy right now: to put the brakes on a growing economy and reduce inflation.

BofA has had many recent victories that illustrate its resilience and how it is using the current macroeconomic situation to build its business and position itself for long-term growth. In the first quarter, it added 245,000 new consumer accounts and more than 1 million credit cards, plus 29,000 accounts in global wealth and investment management. It is also gaining market share in global banking, with 25% more accounts year-over-year in the first quarter.

Bank of America's outstanding dividend

Bank of America $BAC pays a dividend that, at the current price, yields 2.4%, well above the average of the S&P 500 index. The dividend has been increased annually for about 10 years, since the bank recovered from the financial crisis, and has grown a whopping 2,300% in that time. The bank is now in an excellent financial position and the current challenging economy is not threatening its dividend.

Dividend policy

Bank of America recently announced a dividend of $0.24 per share, payable on June 28, 2024, with an ex-dividend date set for June 7, 2024. As investors look forward to this upcoming payment, let's take a look at the company's dividend history, yield, and growth rates. Using data from GuruFocus, let's take a look at Bank of America Corp's dividend performance and judge its sustainability.

Dividend Analysis - Bank of America Corp has maintained a consistent dividend payout record since 1986 and has increased its dividend every year since the crisis (2009).

Bank of America Corp's dividend yield and dividend growth - Currently, Bank of America Corp has a 12-month dividend yield of 2.36% and a 12-month projected dividend yield of 2.41%. This indicates an expectation of increased dividend payments over the next 12 months.

Over the past three years, Bank of America Corp's annual dividend growth rate has been 8.50%. Extended to a five-year horizon, this rate has risen to 10.60% annually. And over the past decade, the annual dividend per share growth rate is an impressive 31.70%.

The question of sustainability

To assess the sustainability of the dividend, it is necessary to evaluate the company's payout ratio. The dividend payout ratio provides an indication of the proportion of earnings that a company pays out as dividends. A lower ratio indicates that the company retains a significant portion of its earnings, which ensures the availability of funds for future growth and unexpected downturns. As of March 31, 2024, Bank of America Corp's dividend payout ratio was 0.32.

Bank of America Corp's profitability offers an understanding of the company's performance relative to its peers. GuruFocus rates Bank of America Corp's profitability a 6 out of 10 as of March 31, 2024, indicating decent profitability. The company has posted positive net income for every year in the past decade, further solidifying its high profitability.

Earnings are the lifeblood of any company, and Bank of America Corp's earnings per share, along with its three-year earnings growth rate, indicate a strong earnings model. Bank of America Corp's revenue has increased approximately 7.90% annually on average, outperforming approximately 53.83% of global peers.

The company's three-year EPS growth rate shows its ability to grow earnings, a key component to sustaining dividends over the long term. Over the past three years, Bank of America Corp's earnings have increased approximately 21.10% annually on average, which exceeds approximately 62.09% of global competitors.

Finally, the company's five-year EBITDA growth rate is 6.80%, which exceeds approximately 46.27% of global competitors.

Quarterly Results (Q1 2024)

Bank of America reported its financial results for the first quarter of 2024. Net income was $6.7 billion, or $0.76 per share. Revenue was $25.8 billion, including net interest income of $14.0 billion. Results include a $700 million pre-tax FDIC special charge. Adjusted net income was $7.2 billion and adjusted earnings per share were $0.832.

This was down from the first quarter of 2023, when net income was $8.2 billion and earnings per share were $0.94. Revenue, adjusted for interest expense, was $25.8 billion, a decrease of $440 million (2%). Net interest income declined 3% to $14.0 billion, driven by higher deposit costs outpacing asset income and modest loan growth.

Credit loss expense was $1.3 billion, up from $1.1 billion in the fourth quarter of 2023 and $931 million in the first quarter of 2023. Net credit losses were $1.5 billion, up from $1.2 billion in the fourth quarter of 2023 and $807 million in the first quarter of 2023.

Noninterest expense increased $1.0 billion (6%) to $17.2 billion. Excluding the FDIC special charge, adjusted noninterest expense was $16.5 billion, an increase of approximately $300 million (2%).

Average deposit balances were $1.91 trillion, an increase of $14 billion from the first quarter of 2023. Period-end deposit balances saw an increase of $23 billion to $1.95 trillion compared to the fourth quarter of 2023. Average loans and leases were $1.05 trillion, an increase of 1% from the first quarter of 2023.

CET1 capital was $197 billion, an increase of $2 billion from the fourth quarter of 2023, with a CET1 ratio of 11.8% (normalized), 184 basis points above the regulatory minimum. Shareholders were returned $4.4 billion through common stock dividends and share repurchases.

Return on equity (ROE) was 9.4%, while return on tangible common equity (ROTCE) was 12.7%. The adjusted ROE was 10,2 % and the adjusted ROTCE was 13,8 %.

Chief executive Brian Moynihan highlighted that the bank had a strong quarter, with all business segments performing well. The number of consumer current accounts reached a record 36.9 million, with continuous growth over the last 21 quarters. The Wealth Management division posted record client revenues and balances, and Investment Banking recovered.

Key performance indicators

Let's dive into Bank of America's core financial metrics, which reveal more than just numbers - they tell the story of its market position and financial stability.

Let's start with market capitalization, which stands at $308.83 billion. That's a lot of money in play and gives us an idea of the bank's size and influence in the financial markets. With 7.82 billion shares outstanding, it's clear that Bank of America has a broad shareholder base, which is often a sign of investor confidence.

The bank's revenue reached $116.93 billion, a robust number in the context of the banking sector. Daily trading volume in the bank's stock averaged 30.29 million, indicating high liquidity and investor interest, although this average is slightly below the long-term average of 36.03 million.

Let's look at valuation. The P/E (price-to-earnings) ratio is 13.62, which is relatively low and may indicate that the bank's stock is currently undervalued or that investors expect lower earnings growth. A P/B (price-to-book) of 1.05 indicates that the market price of the stock is very close to its book value, which is often seen as a signal of stability. A P/S (price-to-sales) of 2.60 indicates a reasonable market value relative to earnings.

Debt ratios tell us a lot about a bank's financial strategy. The D/E (debt-to-equity) of 2.27 is quite high and indicates that the bank is using a significant amount of debt to finance its operations. D/C (debt-to-capital) at 0.69 confirms that debt makes up a large part of the bank's capital structure. These values are important for understanding the risks associated with the bank.

Looking at earnings per share (EPS), we see a figure of 2.90, which provides investors with a solid return on their investment. The return on assets (ROA) is 0.76%, which is typical for large banks that operate with a huge amount of assets. Return on equity (ROE) is 8.66%, which is quite strong, while return on invested capital (ROIC) is 2.61%, which may indicate efficient use of capital to generate profits.

Finally, the bank's margins are another interesting aspect. The gross margin is 21.40%, indicating a healthy gap between revenue and cost of sales. The operating margin is 77.92%, which is considerably high and indicates efficient management of operating expenses. The net margin of 22.68% confirms that the bank is able to maintain a significant portion of its income as profit. Free cash flow (FCF) at 13.41% further underscores the financial health and ability to generate cash.

Analysts' expectations

Based on 22 Wall Street analysts who have offered 12-month price targets for Bank of America over the past 3 months. The average target price is $40.43 with a high forecast of $46.00 and a low forecast of $35.20. The average target price represents a change of 2.38% from the last price of $39.49.

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