Bank of America (BAC) is a good company that trades at a reasonable price.
Founded in 1904, Bank of America has been in business for over 100 years and has banking offices across the country. The company is one of the most trusted banks, with 66 million retail and small business customers served by more than 4,200 banking offices. Bank of America provides many products and services to consumers, businesses and institutional investors.
The Fed raises rates to control inflation. The increase, the Fed’s first in three years, comes as it seeks to manage inflation more effectively. There are also six interest rate hikes to come.
The financial sector has been equally sensitive to major changes in the economy in recent years, but it has been particularly sensitive to changes in interest rates.
At higher interest rates, the profit margins of banks, insurance companies, brokerage firms and fund managers will likely increase. Higher rates give these entities a lot of leeway.
If the National Bank raises rates another seven times, banks with floating rate loans outstanding expect a huge increase in net interest income. Therefore, Bank of America will benefit massively since a large portion of its portfolio is made up of floating rate loans. I am neutral on the title.
Net benefit from interest rate increases
Bank of America is poised to experience significant jumps in earnings due to rising interest rates. Indeed, BAC is the most sensitive to interest rate increases among the major banks.
Alastair Borthwick, the bank’s chief financial officer, recently noted on the company’s recent earnings conference call that the bank is seeing significant growth in its balance sheet. In addition, it is twice as sensitive to changes in interest rates as when interest rates have risen before.
In addition, Bank of America has greatly improved its deposit base, which will allow it to increase its margins when rates rise.
According to the bank’s plans, the company is ready to take advantage of the new market conditions. It plans to keep spending flat for this year, which should give it an edge over other competitors.
Consumer demand for the best possible experience is fueling a digital transformation in banking.
As one of the nation’s leading financial institutions, Bank of America has witnessed the rapid growth of digital engagement for its customers. The Bank of America app has completed 85% of its deposit transactions in recent years.
Bank of America has invested heavily in technology. This results in more users, which is a good indication of the success of their product.
Bank of America reported a 24% decline in cash and checks in 2021. Brian Moynihan, CEO of BAC, noted that this demonstrates the shift to digital offerings.
It had 2 million more active digital banking customers in the fourth quarter than in previous periods, and 70% of its households were actively using digital platforms. Additionally, the company recorded 1.5 million digital sales, up 46% year-over-year.
Bank of America is a financial institution that has been around for a long time. It has a history of paying dividends and share buybacks are impressive.
When looking for a dividend stock, we want to find companies with both the power and the financial stability to maintain and grow their dividends.
BAC increased its quarterly dividend to 21 cents per share beginning in the third quarter, up 17%. The company’s regulatory stress tests showed it could handle the pressure.
Bank of America has a dividend yield of 1.85%, which is quite close to the industry average of 1.63%.
As you can see from this graph, the dividend yield suffered during the pandemic, but is now stable. The payout is also 22.67%, which is very conservative and easily covers the company’s dividend.
Additionally, BAC has a strong history of share buybacks. Bank of America announced plans in April to buy up to $25 billion of its own stock on the open market. So far, $14 billion worth of shares have been purchased by the end of Q3 2021.
The Taking of Wall Street
Bank of America has been trading at a discount for the past few months due to larger macroeconomic factors and geopolitical issues at play.
Shares of the multinational investment bank sport a moderate buy consensus rating, based on 11 buy ratings and seven hold ratings over the past three months.
BAC’s average price target is $51.79, implying an upside potential of 20.4%.
Moynihan has done a remarkable job of transforming Bank of America in these tumultuous times of financial crisis. The bank has evolved from one of the organizations struggling to maintain viability to a lean organization with excellent asset quality and advanced technology.
According to the financial report published by Bank of America, its status is extremely healthy and solid for the future. If you add the dividends and strong prospects, you have the recipe for a lot of success.
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