BofA: Beyond the Dividend (BAC, JPM, WFC, STT, BK)

Bank of America Corporation (NYSE: BAC) is performing rather well when you consider that the bank’s dividend is not likely to rise as fast as some of the more healthy banks.  The banking giant is hosting its investor day conference and has laid out some expectations that offer some cheer despite some concerns we have.

If you look at what CEO Brian Moynihan said, the implication is actually higher normalized earnings than what investors seem to have been expecting.  When things have normalized, the bank could be earning $25 billion to $40 billion a year. Moynihan also noted that the bank will be able to pay up to $12 billion a year in dividends at that point, implying a 30% payout ratio.  Again, that is a 2013 story.

The bank actually expects a very modest uptick from its current $0.01 per quarter if and after it is freed up to begin a higher dividend.  It is not until later this month that the government is expected to communicate which banks will and will not be able to begin paying higher dividends.  J.P. Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) are the two money-center banks we expect to begin a much faster rise to higher dividends as they are healthier.  On the custodian side of the equation, we expect State Street Corp. (NYSE: STT) and The Bank of New York Mellon Corporation (NYSE: BK) to get back into the higher dividends much sooner rather than later.

Another aspect that is interesting is that BofA seems to be leaning toward a split of the old legacy “bad mortgages” from its existing and future mortgage operations.

The shocking call was that the bank could close and/or consolidate up to 10% of its branches.  The bank is already above the deposit ceiling of 10% of bank deposits.  Moynihan has said adamantly that the days of acquisitions are behind it.  Still, after all of the branch acquisitions that BofA made over the last two decades it seems that branch closures could involve more goodwill writedowns ahead.

If you go back to the dividend, one item which was brought up was a special cash dividend.  Moynihan gave a $30 billion target of excess capital returns post-2014 when operations and earnings have normalized.

There is one aspect that greatly needs to be considered here regarding “Normalized.”  The economic recovery is a rather fragile recovery.  Unemployment remains high and housing is not on the mend.  Higher interest rates and a more flat steep curve are also likely awaiting if the recovery can be sustained.  What if oil remains high and what if the fiscal situation in America deteriorates further?

We are not looking at any imminent double-dip recession here by our take.  Still, the tax settlement only went out until the end of 2012 and we also have another election next year. It seems unlikely that the political rallying next year will be one of a return to the old normal.

As far as what BofA is calling “normalized earnings,” we’d look for something between the expectations of 2011 and the more rosy expectations laid out today for a better tell than merely just taking Moynihan’s predictions as gospel.

JON C. OGG