Did You Buy This Stock?
BofA's Been Up as Much as 12%
I'm not messing around here. I want to make money. I want my Wealth Advisory readers to make money. And I want you to make money.
Money may not buy happiness, but it can't hurt to give it a shot.
So here's my best shot...
On Wednesday, February 27, I told Wealth Daily readers to buy shares of Bank of America (NYSE: BAC) before the March 1 sequester deadline.
Here's what I said:
Do you think these fund managers are avoiding stocks because of $85 billion in government spending cuts?
Not bloody likely!
I find it much more likely that fund managers and other institutional types are using the current sequester fear factor to work prices up and down while they add stocks to their portfolio. I'm currently focused on one such stock that is a hedge fund favorite, has been run down better than 10% in the last 5 days and has a significant upside catalyst that's just two weeks away...
Bank of America traded between $11.10 and $11.36 that day. It's $12 right now, and has been as high as $12.44 since I made that recommendation. That's as much as a 12% gain.
If you didn't buy it then, buy it today.
Because on Friday, the second half of the Fed's bank stress tests will become public knowledge.
We already know BofA passed with flying colors...
Now we'll find out how big the bank's dividend increase will be.
There's no doubt in my mind Bank of America is asking to raise its payout. CEO Brian Moynihan made the dividend his #1 priority over the last year: He sold under-performing divisions to raise cash; he settled lawsuits to remove liability; and he's improved non-performing loans.
His actions netted the bank $60 billion, $12 billion of which went right into capital reserves.
That's why Bank of America has higher capital reserves than JP Morgan (NYSE: JPM) and Goldman Sachs (NYSE: GS). It's why Bank of America has the best earnings growth estimates for 2013.
And it's why Bank of America will paying a much larger dividend as of this coming Friday.
How Much is Enough?
Bank of America currently pays $0.04 a year in dividends. Every three months, shareholders get a shiny penny for every BofA share they own. Gee, thanks!
That's about to change....
Bank of America says it wants to pay out 30% of earnings as dividends. Based on 2013 earnings estimates, that would mean a dividend of $0.30 a share. That's a lot more pennies than it pays right now.
I don't think BofA will be given permission to pay $0.30 a share. I think $0.16 to $0.20 is more realistic. That's still a lot more pennies than it pays now.
But the question is: What will happen to the share price?
When the market finally made its post-financial crisis bottom on March 9, 2009, Bank of America was more than 80% off its 2008 highs. JP Morgan and Goldman Sachs were both off around 60% from their 2008 highs.
Today Goldman is about even with its highest levels from 2008. JP Morgan is nearly 40% higher than its 2008 highs. Bank of America? It's still 60% below its highs from 2008 — and yet it has a stronger capital structure than either JP Morgan or Goldman Sachs.
Seems to me the disparity is because of dividends... or lack thereof.
T-Minus 3 Days and Counting...
Brian Hicks and I recommended Bank of America to our Wealth Advisory readers back in November at $9.10 a share. It's been up as much as 36%.
(The total Wealth Advisory portfolio is up 24.9% so far in 2013, after a 19.8% advance in 2012.)
Bank of America is also a favorite among the hedge fund crowd: 23 hedge funds have Bank of America as a top 10 holding.
Why? Because they think there's a lot of value in the stock.
Bank of America has a tangible book value somewhere between $13.50 and $14 a share. That's the “brick and mortar” value, if you sold all the buildings and assets. It's difficult to nail down because it changes as the bank's cash reserves grow and as its liabilities decrease.
Could Bank of America ramp to $13 this Friday after its new dividend is established?
Sure it could, though I think $12.80 is more likely. And over the next year, I think $16 is a good target for the stock.
One More Thing
I have to acknowledge the potential for a stock market correction sometime soon. Stocks have been advancing relentlessly since the tax aspect of the fiscal cliff was resolved. This rally is overdue for a breather.
A 5% correction would push the S&P 500 down to 1,480 or so. But frankly, that doesn't seem too realistic at this point. Because I think it's likely there are a lot of buyers waiting to enter on the first sign of a dip.
A move to the 1,500-1,520 range seems much more plausible.
However, I don't expect a correction will impact Bank of America much. Income funds and dividends investors will be supporting the stock.
Like I said earlier, Bank of America is my best shot. I've got other ideas, for sure...
We just recommended a high-yield energy stock that could have 35% upside to go along with its 18% dividend (that's not a typo: the divvy is 18%) to Wealth Advisory readers. But that one carries a little more risk than BofA.
I'll be back next Wednesday, and we'll see where Bank of America is...
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
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