Will Bank of America Overcome Regulatory Worries?
Bank of America Corp. (NYSE: BAC) finally was allowed to boost its dividend in 2014. The payout rate went to $0.05 per quarter from $0.01. That took five years to come back, and it obviously will be many years before Bank of America gets back to the old $0.64 per quarter dividend prior to the recession. From every indication we had at the time in 2014, the bank wanted more of a dividend hike than it was allowed, but it was effectively just off of the list of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR).
In short, Bank of America took what it could get and would fight for a higher payout on a future day. This year is looking more stable for Bank of America in earnings, and along with Buffett’s investment, the bank seems to be on better grounds with regulators. The bank is almost certainly in the second half of the game by far on legal settlements tied to financial crisis and mortgage crisis from the Great Recession. Still, it seems almost silly to expect that Bank of America could raise its dividend by another 400% like we saw last year.
What does not seem silly is that it could raise its dividend to $0.075 per quarter, or maybe to $0.10. The wild card is that its litigation expenses were $16.4 billion in 2014, versus $6.1 billion in 2013. Also there was a disclosure in its 10-K of mandated modifications to its Basel models, which recently prompted UBS to downgrade the stock to Neutral from Buy. Bank of America’s common stock currently yields only about 1.2%, far lower than the 2.7% for J.P. Morgan Chase and the 2.5% at Wells Fargo.
BofA Update March 11 – Dividend hike denied, Buyback approved
Chevron’s Dividend Conundrum With Low Oil Prices
Chevron Corp. (NYSE: CVX) last announced a dividend hike with a 7% payout raise at the end of April in 2014, long before the world had to deal with drastically lower oil prices. The company most recently kept its $1.07 per share dividend, and our take is that the company will make every effort to commit to a dividend hike to maintain its “dividend grower” strategy. In fact, Chevron just raised $6 billion in a debt offering to shore up its balance sheet.
What investors should consider here is that earnings were over $10 per share in 2014, and the consensus estimate is now $3.93 per share for 2015. That consensus target was over $9 just 90 days ago. Given the longstanding dividend race going on with Exxon Mobil and other oil giants, investors have to be very tame in expectations here — maybe only a 1% or so dividend hike, versus the seen 7% last year. That would be nominal, but at least it lets management say they had a hike.
Of course, investors have to consider that this projected dividend hike is price-dependent on the oil market. If oil goes back under $40 and there appears to be no end in sight, let’s just say all bets are off and the company will say that it will raise that payout when higher energy prices permit. The current yield is now about 4.0%, so it is not as if the company has a paltry yield on its hands.
Citigroup MUST Get Back on the Dividend Track
Citigroup Inc. (NYSE: C) may be a bit in the same place that Bank of America was last year, except that it still has not yet formally been allowed to resume higher dividends. The Federal Reserve gave it a failing grade for higher capital allocations in the CCAR of 2014. That left the $0.01 dividend in effect since early 2009.
Citi investors were not very happy when the CCAR review kept Citi from raising that payout. The bank has seen many moves in management in recent years, and it is still opportunistically looking to divest international and domestic operations that it has deemed noncore assets. A wild card is the huge charges that Citi recently took. Regulators may treat the bank differently, but this will be a known outcome by mid-March on the next CCAR at the Fed.
Having a $0.01 payout and a $52 stock price handle does not lend much to dividend investors. In fact, that payout is so low that it is meant to be an honorary dividend that prevents income-only investment funds from being forced out of the stock.
Before we get too ambitious on thinking that Citi is expected to earn over $5.00 in 2015 and 2016, all we can do is remember back to the Bank of America dividend move that went from one cent to a nickel per quarter. Maybe the Fed will be nicer this time around, but we just do not see the bank getting to magically pay a 1.2% dividend ($0.60 per share annualized, or $0.15 per quarter) just to be nice. A hike seems to be in the cards this time, but we will leave the predicted outcome up to the regulators.