3 Ways Bank of America Could Become a Dividend Powerhouse


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These three key themes could boost Bank of America's dividend yield going forward.

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3 Ways Bank of America Could Become a Dividend Powerhouse

  1. 1. Subhead 1 3 Reasons Why Bank of America’s Dividend Yield Could Climb Higher
  2. 2. 1Normalizing litigation expenses
  3. 3. After years of expensive litigation and settlement issues related to its acquisition of Merrill Lynch and Countrywide, BofA shelled out another $6 billion in litigation expenses in Q1 2014 alone. Though BofA made headlines again recently as the DOJ is battling the bank's $12 billion settlement offer to end the DOJ's probe into its mortgage practices, the bank has indeed made great progress in resolving most of its mortgage-related legacy issues over the last three years. Once the DOJ settlement is off the table, Bank of America will be able to focus on growth and divert more cash to shareholders.
  4. 4. 2Consumer Real Estate Turnaround
  5. 5. BofA should further experience significant earnings tailwinds from a cyclical turnaround in its CRES unit. BofA's Consumer Real Estate business was hit hard by the downturn in the housing market as well as ongoing litigation which caused a whopping $5 billion loss in Q1 2014. Strength in the housing market and momentum in mortgage originations, however, should benefit BofA's highly business- cycle sensitive real estate business which could see normalized profits of $1-2 billion a year going forward.
  6. 6. 3Improving asset quality
  7. 7. Another key theme that could be instrumental in pushing BofA's dividends is interrelated to the other two themes and relates to BofA's improving asset quality. The underlying credit quality of loans and mortgages improved dramatically after the recession as the bank devoted large amounts of resources to working through its legacy issues. BofA's credit trends have shown consistently lower net- charge offs and provision expenses. BofA's Q1 2014 net charge-off ratio, for instance, stood at only 0.62%. Should those trends continue into the recovery, which is likely, BofA will experience significant relief on the cost side of the business and be able to benefit from mean-reverting earnings.
  8. 8. The Foolish Bottom Line
  9. 9. BofA should be able to increase its dividend yield from 0.26% now to the 2-3% range driven by normalizing litigation expenses, higher earnings in the real estate division and improving asset quality. BofA has a reasonable chance to earn about $13-15 billion a year in normalized earnings. If the bank decides to pay out about 1/3 of those earnings to shareholders, investors would be able to pocket a dividend yield of somewhere around 2.5% which is a much more competitive yield and light years away from the current 0.26%.
  10. 10. Top dividend stocks for the next decade