Bank of America’s June 29 announcement that its 5-cent dividend is going to 7.5 cents was welcome news to shareholders who’ve been yearning for a higher payout. But for investors still looking for a return to the 64 cents the Charlotte bank paid before the financial crisis, the wait could be long.
The Federal Reserve approved the larger quarterly dividend for Bank of America’s common shareholders as part of its annual “stress testing” of the nation’s biggest banks. It was a victory for CEO Brian Moynihan, following Bank of America’s past stumbles on some of the exams.
The higher dividend, expected to start this quarter, marks the second time Bank of America will increase the payout after cutting it to 1 cent during the financial crisis. In other good news for investors, the move positions the bank to boost the total amount of capital being returned to shareholders for another year in a row.
But some investors remain frustrated the dividend isn’t rising faster, including those in Charlotte who relied on the heftier payouts as retirement income. Here are three reasons the pace has not been quicker.
1. Large crisis-era costs
Bank of America’s massive costs to dig itself out of the crisis have meant fewer dollars that could be put to other uses, like raising its dividend.
The nation’s second-largest bank by assets has spent $70-plus billion on settlements tied to the crisis – more than any other U.S. bank, according to a report from SNL Financial. The figure includes Bank of America’s record-setting $16.65 billion mortgage settlement with the Justice Department in 2014.
“As they’ve paid those billions of dollars out, that’s capital that they’ve had to forgo,” said Marty Mosby, an analyst for Tennessee-based Vining Sparks.
Some other big banks with fewer crisis-related costs have been able to restore their dividends above pre-crisis levels, such as Wells Fargo and JPMorgan Chase & Co. Last month, the Fed cleared Citigroup to raise its dividend from 5 cents to 16 cents, still below the 54 cents it paid in the run-up to the crisis.
But Bank of America is outpacing Citigroup on another closely watched measure of dividend size. Bank of America’s dividend yield, the payout as a percentage of its share price, is about 2.3 percent based on its recently approved capital plan. Citigroup’s is about 1.5 percent.
The dividend yield is more than 3 percent at Wells Fargo and JPMorgan, which have not announced plans to increase their dividends since the stress tests.
Compared with Citigroup, Bank of America also plans to spend more on dividends over the next 12 months, under the new capital plans the Fed approved. Bank of America announced $3 billion in dividends compared with $1.8 billion planned at Citigroup.
On another key measure for investors, Bank of America is projected to lag its large peers.
Bank of America’s payout ratio – the percentage of profits used for common stock dividends and share repurchases – is estimated to be 54 percent over the next 12 months, according to analysts at Deutsche Bank. Estimates show Citi at 76 percent, JPMorgan at 84 percent and Wells Fargo at 82 percent.
Some analysts say Bank of America could have afforded to return more capital to shareholders in its latest capital plan.
“Clearly they’ve been very conservative,” said Erik Oja, an analyst with S&P Global Market Intelligence. But he added the bank’s $5 billion in planned stock buybacks over the next 12 months represents a strong growth rate from the $2.4 billion repurchased last year and $1.7 billion in 2014.
Bank of America declined to comment beyond a press release issued last month in which Moynihan cited higher earnings and other improvements that have allowed the company “to take a significant step toward returning more capital to shareholders.”
2. New Fed requirements
Since the crisis, regulators have required big banks to bolster their capital in preparation for the next recession, preventing the companies from returning some of it to shareholders.
The Fed uses its annual stress tests to determine whether the stockpiles are large enough to allow banks to continue operating in another downturn. Some banks have struggled on the exams, including Bank of America, which has had miscues on three tests in past years. Last year, for example, the bank had to resubmit its capital plan after the Fed found deficiencies and weaknesses in its capital planning processes.
Oja said wild swings in earnings could also make it harder for banks to convince the Fed to let them return more capital. Since the crisis, Bank of America’s earnings have been as low as $1.4 billion in 2011 and as high as $15.9 billion last year.
“Regulators would prefer to see less volatility in profits before they will allow banks to return more capital,” Oja said.
Bank of America’s current pace of returning capital also comes as it seeks to prepare for future Fed requirements.
The bank is pushing to increase its common equity tier 1 ratio, which measures high-quality capital as a share of risk-weighted assets. The Fed will require the ratio to be at least 10 percent by 2019, according to the bank.
While the bank was at 10.1 percent at the end of March, it wants to hit 10.5 percent to give itself a bigger buffer.
3. Massive shareholder dilution
Shareholders can also blame billions in additional shares Bank of America issued since the crisis as another reason the dividend probably won’t return to yesteryear levels anytime soon.
The bank has about 10.3 billion in outstanding common shares, more than double the 4.4 billion in 2007. By comparison, JPMorgan has about 3.6 billion in outstanding shares.
Bank of America diluted shareholders largely through shares it issued to fund its 2009 purchase of Merrill Lynch, as well as to bolster its capital that same year as the bank dealt with fallout from the financial crisis. Much of the dilution also came from a 2010 conversion of securities into common shares. The bank sold those securities to repay the federal government’s bank-bailout plan, known as the Troubled Asset Relief Program.
Today, it would cost the bank about $26.4 billion a year to pay a 64-cent dividend, more than eight times what it plans to spend on dividends over the next 12 months. During 2008, the bank spent about $10 billion to pay a 64-cent dividend on about 4.5 billion shares.
The bank says it continues to buy back shares in an effort to reduce the dilution.
But one wild card for its future share count is famed investor Warren Buffett, whose Berkshire Hathaway holds rights to buy 700 million common Bank of America shares for $7.14 apiece.
Buffett received those rights in exchange for a $5 billion injection he provided Bank of America in 2011 to help the company, which was still coping with financial crisis fallout.
The clock is ticking for Buffett to exercise the rights, which are set to expire in 2021. For shareholders, that could mean further diluting their stake unless the bank buys back more shares before then.