There’s Room for Optimism With Bank of America Stock

Dividend Stocks

Bank of America (NYSE:BAC) is the second-largest bank in the United States, with 5,000 locations and a footprint that stretches across 37 states . It is truly a “national” bank and a dominant player with retail accounts, loans, mortgages and wealth management services. But along with the other big banks, BAC stock has been hammered in 2020 with a double whammy.

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The coronavirus slowdown is a short-term disaster for the economy, as  unemployment has skyrocketed and home mortgage rates have collapsed.

Meanwhile, the Fed’s decision to cut interest rates to near zero to boost the sagging U.S. economy has hurt bank stocks. That’s because the rate cut will make it even harder for Bank of America and its peers to make profitable loans.

After the Senate passed a $2.2 trillion relief package, how should investors look at Bank of America? Let’s take a closer look at this dominant player in the financial services industry.

Bank of America at a Glance

BAC stock is down a whopping 35% this year. But it’s helpful to take a broader perspective.

Before February’s selloff sparked by the coronavirus pandemic, BAC stock had reached all-time highs, rising as the stock market peaked.

Considering the large decline of Bank of America’s shares in 2020, there’s significant room for the shares to move higher after the coronavirus threat begins to wane and people start going back to work.

And Bank of America’s statistics show plenty of reason for optimism.

The bank has a tangible book value of $170 million, and its debt-equity ratio is near a 15-year low. BAC stock is trading at a low price-earnings ratio of 7.7.

And its dividend is even better. Bank of America currently offers a solid 3.4% dividend yield, and its annual payout of 72 cents per share is more than 9% higher than last year’s level. Over the last five years, the bank has increased its dividend by an annual average of more than 37%.

Those are the key reasons why my Dividend Grader tool gives Bank of America an “A” rating.

Looking Ahead for BAC Stock

The $2.2 trillion relief package passed by the Senate on Wednesday should be a big tailwind for BAC stock in the next few weeks. The House of Representatives is expected to pass the bill this week and send it to President Trump for his signature.

The bill includes payments of $1,200 to individuals making less than $75,000 a year and increases unemployment benefits and even extends them to freelance workers. That will help BAC’s retail banking business, as its customers will continue to see some income and be able to – hopefully – sustain themselves through Q2 and beyond.

The proposal also includes $350 billion in loans guaranteed by the federal government to small businesses and creates a $500 billion government lending program for struggling companies. Odeon Capital analyst Dick Bove says that the stimulus package could be a major tailwind for Bank of America stock.

Make no mistake;  the Fed’s move to cut interest rates to near-zero is a long-term problem for Bank of America and other bank stocks. Low interest rates put a major squeeze on bank’s net interest margins, which is the difference between what banks pay depositors and what they charge customers for loans. The lower the interest rate, the less profit banks can make from loans.

But there’s no doubt that Bank of America is in a stronger position today than it was in 2008-09, when the banking industry was the cause of the financial crisis. For investors looking for a consistent source of dividends from a blue-chip company, BAC stock is a great choice in this challenging market.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.

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