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http://yahoo.businessweek.com/bwdaily/dnflash/aug2005/nf20050818_0539_db006.htm

Q: Looking for high dividend stocks -- any ideas?
A: Yes. I focus on the idea of high dividend growth vs. high yield. But one stock that stands out, where you can have your dividend and grow it, too, is Bank of America (BAC). The yield is just under 5%, with a dividend growth rate of 13%. So not only is there a high yield in this low-return environment, but there's tremendous opportunity for growth.

People are worried about the diminished capability of banks to generate profits, but banks have evolved and can manage a rising cost of funds through hedging, as well as exposure to fee-based lines of business. The sensitivity of banks to financial trends has been reduced. So in Bank of America we have a solid company with a very, very attractive yield.


Mklien's 16 year BAC chart:
http://invest.kleinnet.com/bmw1/stats16/BAC.html
Average CAGR 12%
Cur CAGR 10.8%
-1 RMS
RF 1.24
The stock has gone lower than -1 RMS for only 3 short periods in 16 years. Not a screaming buy, but a nice dividend. Current Price $43.12
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No. of Recommendations: 9
http://invest.kleinnet.com/bmw1/stats16/BAC.html

Average CAGR 12%
Cur CAGR 10.8%
-1 RMS
RF 1.24
The stock has gone lower than -1 RMS for only 3 short periods in 16 years. Not a screaming buy, but a nice dividend. Current Price $43.12 -StuyvesantGrad70

I agree. This is not what I look for in a great BMW Method selection, but this is a good stock for just about any portfolio at the present price. It is not a steal, but it is surely almost perfectly priced.

The right time to buy according to the BMW-M was in late 2000 when the price was $20/share split adjusted. An investor could get a solid double in price yielding a 16.5% CAGR plus the 4.6% dividend. The BMW Method Board wasn't around in 2000 so we couldn't see that opportunity. However, it is hard to go wrong with BAC even at today's price.

The P/E Ratio is 10, the growth is at 10.8% and BAC is showing a very consistent pattern on Mike's chart. Why would it go to the -2RMS level?

If we invert the P/E Ratio, the E/P (Total return) is 10%. That matches the growth rate as indicated by the CAGR. They pay out about 50% of the earnings in the dividend and the ernings are solid. This is a wonderful business at a fair price. I would not discourage anyone from buying BAC at it's present price level.

How wrong can an investor go with about an 11% CAGR and a 4.6% annual dividend yield? This is a stock to buy and just put away forever. Take the dividend and enjoy the ride. Boring but very safe and it beats the market average. I like it better than a mutual fund or an index fund.
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Now there's a stock to lock down! Not as a BMW play, but as a bond play. Treat the stock like a bond. Hang onto it for 30 years and take the dividend. I'm going to start nibbling around 43.

nmckay
boring=good
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Stu,

Tell me how to do DD on a bank? I like the -1 RMS and the diividend but how do I know this bank is good value?

Cheers, Gary
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No. of Recommendations: 11
Hi Gary,

I know you asked Stu and I am looking forward to his answer. I've asked this same question on several boards over the past couple of years and never got a good response. Here is a post that Chuck (babyfrog) wrote a couple of years ago when he decided to buy BAC after the market had overreacted in a negative way to its purchase of Fleet Boston. It uses a dividend discount model that it references.

http://boards.fool.com/Message.asp?mid=19776382&sort=recommendations

That bite took quite awhile to swallow, but by all accounts, has been successfully digested (sorry about the eating references - it must be getting close to dinnertime). I believe the recent weakness is in response to their purchase of KRB (MBNA) and uncertainties surrounding the amount they paid and the costs associated with the integration. Note I own BAC and KRB and therefore just went through the experience of having one of my companies buy another of my companies (kind of like kissing your sister from what I can tell).

This latest purchase puts BAC fully in the same league with C in terms of scope of services and offerings. C has a larger international presence, but BAC will be larger domestically. C's market cap is $222B and BAC's will be $204B post-merger. Comparing a few other metrics:

BAC C
P/E 10.6 10.7
PEG 1.05 0.96
Div 4.2% 4.0%

These two companies are among my largest holdings and serve as part of the foundation of my portfolio. They both have increased their dividends every year for the last decade or more and are diversified to the point that they can weather almost any economic climate short of collapse of the international banking system. They both grow earnings consistantly and I look to add on dips. Having just inherited more BAC through the KRB deal, I'm actually looking a little bit harder at C right now. I like to have some steady income producers to balance out some of my riskier, higher growth companies.

I have dived into their 10K, but it is among the most complicated financial statements that I have ever seen. The section on derivatives and hedges covers several pages. I look at things like ROE, ROIC, asset and debt trends, eps, and dividend growth. I also keep an eye on the benefit, claims, and credit losses line item compared to revenue.

I happen to recently have taken some comfort from being able to look at the BMWM curves to give me a notion of their valuation relative to history. I do hope you get a better answer to your DD inquiry than this, but it was cathartic to put my thoughts down on paper. I'm reminded of the old story concerning Willie Sutton being asked why he robbed banks. To which he replied "That's where the money is". Maybe that's why I like these companies.

Sorry about the ramble.

Best regards,
Stan
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No. of Recommendations: 2
Here is a post that Chuck (babyfrog) wrote a couple of years ago when he decided to buy BAC after the market had overreacted in a negative way to its purchase of Fleet Boston.

When I was a student in Boston, back in 1958, I opened an account with The Harvard Trust Company

which became Bay Bank

which was bought by Bank of Boston

which was bought by Fleet

which was bought by Bank of America

I don't know about kissing sisters. It sounds more like big fish eating little fish. :)

Denny Schlesinger
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Good post Stan.

Why did I do it? How dumb am I, exactly? Well, those are very good questions to ask...

Babyfrog doesn't look very dumb from where I sit.

MW
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No. of Recommendations: 11
Stu,

Tell me how to do DD on a bank? I like the -1 RMS and the diividend but how do I know this bank is good value?

Cheers, Gary


Here are links to a couple of informative articles and also a bank annual report analysis spreadsheet:

A Common Sense Approach to Analyzing Bank Stocks
http://www.betterinvesting.org/articles/bits/221/2721
Summary:

Operating Revenue Formula:
Revenue = A + B + C – D
Where:
A = Net Interest Income
B = Non-Interest Income
C = Tax Equivalent Adjustment (An adjustment which takes into account that some of a bank's assets are in tax exempt securities, and it adjusts that interest income on a fully taxable equivalent basis.)
D = Loan Loss Provision (An expense which is set aside as an allowance for bad loans)
A, B and D can be found in the Annual Report, Valueline Report or S&P Report.
C can be found in the S&P Report and some Annual Reports. A and B account for most of the revenue. C and D are refinements to get the best possible number.

If the loan loss provision is growing faster than the loans, it is a red flag.

Return on Assets
- represents how much money is being made for every dollar of assets held. It measures the underlying profitability of a bank's entire operation.

Net Interest Margin:
- is the difference between interest paid to depositors and other sources of funds and the interest collected on loans and other investments (interest earned and interest paid). This amount is then divided by average earning assets. This number measures a company's success in the basic banking business.

Return on Assets and Net Interest Margin (which can be found in S&P Reports):
Compare Return on Assets with other banks. A small difference in return on assets represents huge profits, because banks are so leveraged. Remember, for a bank, the loans are the assets, the deposits are the liabilities.

Book Value:
- The value of common stock of a company, found by adding par value of the common, retained earnings, reserves, and surplus. Then divide that sum by the number of outstanding common shares. Compare annual book value per share with annual earnings per share. If the book value is not keeping up with the earnings, it is a red flag.

Studying a Bank’s Revenue and Expenses:
http://dignet.home.mindspring.com/studyingbankstock.htm
Summary:

Noninterest income can include many things that are not part of the ordinary course of business. For example, gains on sales of securities, and sometimes sales of mortgages, can impact the company's reported revenues and profits. Check for consistency versus prior periods.

The largest expense faced by banks is usually interest expense. Other expenses include compensation, occupancy, outsourced services, and telecommunications. It is important to look at this list for signs of anything unusual.

Check the trend in Provision for loan losses. Is the bank having to set aside ever-higher amounts for bad or questionable loans, and is this amount growing faster than its competitors?

Check asset quality. Compare provision for loan losses to chargeoffs -- a charge off is the actual writing off of a bad loan. The provision should be at least two times the level of non-performing (late) loans.

Check return on equity. Better-run banks have a return on equity of 18 percent. Other banks have ROE’s in the mid teens.

Estimate of long-term growth potential by multiplying Return on Equity times (1 minus the percent dividend payout). This would show the growth rate that a company (including a bank) might be expected to achieve if it can reinvest its retained earnings (earnings not paid out to shareholders) at the same return that it received on previous equity capital. A moderate ROE and high dividend payout would suppress future earnings possibilities. Investors should keep earnings expectations moderate when analyzing bank stocks. This moderate earnings growth outlook also tends to keep P/E ratios fairly low in the banking industry.

Analyzing the Annual Report for Banks
http://bob-adams.home.comcast.net/banks.htm
Download this spreadsheet (see webpage above, requires Excel or OpenOffice) to analyze the Annual Report data of Banks. Data reported by Banks, and the analysis of that data, are different from that of a manufacturing company. The data are harder to locate for banks too, and some report important data while others do not. This form is designed to help analyze those data, along with suggestions as to where to get the data they don't provide.

Download this file (see webpage above) to see an example of the Annual Report financial data used in analyzing Bank and Thrift companies. It contains keys to the above spreadsheet, providing help in locating the various data required for the spreadsheet analysis.
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Stu and Stan,

Thanks for the information. I will review over the weekend and I am sure I will have some questions. This is a great place. I enjoy the knowledge and I appreicate the sharing.

Cheers, Gary
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No. of Recommendations: 3
I'm not sure exactly what your objectives are, however if you're looking for a big stable bank stock, I would encourage you to check out Wells Fargo (WFC); at 13.3 P/E with a 3.5% Div. it looks like a buy to me.

If you look at the 16 & 20 year MKlein BMW for WFC:
http://invest.kleinnet.com/bmw1/stats16/WFC.html
http://invest.kleinnet.com/bmw1/stats20/WFC.html
Your at:
AVE CUR RETURN 6-MO
TICKER CAGR CAGR FACTOR RMS PRICE CHG
---------------------------------------------------------
WFC 18.5% 15.7% 1.44 -1.73 60.63 2% (16 Year)
WFC 19.5% 17.0% 1.52 -2.07 60.63 2% (20 Year)

Coincidentally, the Aug. 26, 05 issue of Valueline does a detail review of both the "Bank Industry" (BAC, C, BBT, BK, etc.) and the "Financial Services (Diversified) Industry" (KRB, MMC, AXP, AIG, etc.). If you're interested in comparing all of the major banks side by side you can all of the current data- right there laid out for you. If you're not familiar with ValueLine, it's what Warren Buffett & Peter Lynch are both frequently quoted as saying good things about it. It's usually availabe at your local library for free. WFC and BAC are recommended as Conservative Stocks in that issue.

This brings me to another point / question / comment about the BMW method. It seems to me that there are 2 kinds of stocks that end up discussed around here:

1. Manic Stocks
DRL. AIG. Did Mr. Market lose his meds? Enough said.

2. Drifters
These stocks, like WFC, are those big boring stocks just keep getting better and better each year. The major reason they seem to be as undervalued as they are is because no one's really paying attention to them.

Anyone? As an investor, I've still got a lot to learn- what do you guys think of WFC?

In closing let me say- first post to BMW & to MF; love the board- keep up the great work. With the exception of Doral Financial I do not own any of stocks mentioned in this post.
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2. Drifters
These stocks, like WFC, are those big boring stocks just keep getting better and better each year. The major reason they seem to be as undervalued as they are is because no one's really paying attention to them.

Anyone? As an investor, I've still got a lot to learn- what do you guys think of WFC?

LiamR


The problem with drifters is that since no one is paying attention, no one is buying so the price drifts. What's the catalyst to stop the drift?

Specifically Wells Fargo, it had a relative high on March 10, 1997 and it has 'drifted' since than at a CAGR of 10.2%. Not very exciting even adding in the 3.5% dividend.

Date Price
3/10/97 25.85
8/27/05 58.79

CAGR 10.2%

With "Manic Stocks" at least you know there are people watching and it does take buyers to kick the price up.

Now, if you are happy with a 13.7% 'bond' then you can buy WFC. But the real question is: "what happened to Wells Fargo in 1997 that it has not been able to fix since then? Is this a new permanent condition?"

Denny Schlesinger
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No. of Recommendations: 2
I would think that the catalyst to stop the drift would be consistency- that the company continues to grow and raise their dividends. <question>Isn't that one of the reasons that people like BUD</question>? That even if the on going concern (and the stock price) has fallen on hard times of late, that the management is of a high enough caliber to recover?

As to manic stocks (like DRL which I own) vs. drifters I think that depends on what you're looking for to begin with. I think that your question about WFC 'and the change being a permanent condition' is certainly a good one- I haven't done nearly enough research to pull the trigger on WFC. It was more of a round about suggestion. The only reason it was on my mind to begin with, was because it was one of the featured sectors in the this weeks Valueline.

In this case, the person who opened the thread seemed to be looking for a stable stock, paying a decent dividend, with a chance for moderate price appreciation- a value/income play of sorts. I think for many people safety of principle is a primary consideration; in potentially manic situations like DRL, AIG, or MRK you are making your decision with limited knowledge. OK, so that's always the case- but with many stocks you've usually got some pretty big “what if's” to factor into your equation. On another board someone referred to DRL's volatility as “damaged goods”. While certainly everyone's watching the circus I'm not sure it's entirely appropriate for <TIC>widow's and orphans</TIC>. We should probably start adding boomers to the group of people seeking safety of principle and a decent dividend stream- heck you can me to that list and I'm a little younger than that.

My question / comment was more about the BMWs ability to identify falling stars and sleeping giants. I wasn't following the board as closely at the time, but hadn't the board already even talked about BUD before the BRK announcement? That's more along the lines of what I was commenting / questioning. Looking for those big, safe, value plays.
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I was checking out the BAC board before doing any DD. I came across this diatribe: http://bankstocks.com/article.asp?type=1&id=9880723. The writer has a site and on it
he claims to have been the best known bank analyst on Wall St. during the 80's and 90's.
I post this information as a "heads up" to anyone with an interest in BAC on this board, but as a group I feel thatfurther discussion on this subject should be carried out on the BAC board where it is more germane.
Bill
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Holliday, Karen Kahler
Background re Thomas K. Brown...

http://static.highbeam.com/u/usbanker/may011998/wastombrownsacrificedthomaskbrown/

US Banker

May 01, 1998

Do "frank" and "investment bank" go together? That's what a lot of people in banking are asking themselves after the abrupt departure last month of superstar banking analyst Thomas K. Brown, who left Donaldson, Lufkin & Jenrette seemingly hours after it hired a new investment banking team.

Brown, ranked as the top regional bank analyst by Institutional Investor in eight of the past nine years, had earned a reputation over the years for speaking his mind, regardless of the impact that had on banks he criticized-and despite any external or internal pressures. Indeed, he got embroiled in a public spat with First Union Corp. CEO Edward Crutchfield last year, a rare event for an analyst.

DLJ's new investment banking team, with more than 20 members, is headed by Richard J. Barrett, former head of the financial institutions group at UBS Securities. A DLJ spokeswoman declined to comment, but most Wall Street watchers surmised that the outspoken Brown was viewed as....
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After reading "Blood on the Street" and the article bellgarde referenced, its hard for me to belive in BAC's or C's methods of growing their business.

Any and all sentient BofA shareholders should have sold their stock immediately upon hearing Mark Oken claim that the MBNA deal will generate an IRR of 21.5%, and then hearing him exclude the restructuring charge from the calculation. According to Oken, the $1.25 billion “…. is a one-time charge that we don't consider in evaluating the return on the deal.” Someone please tell Oken that the restructuring charge represents the real utilization of shareholders capital! It is real money. This is just another example of how BofA's management may be nominal shareholders, but in reality think like overpaid employees and not owners!

Nice, just want I want to hear. Kind of like saying this rental property I am buing will make me 21% a year, but I am not counting the costs I have to spend to remodel the thing to get it up to code.

Taylor
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Nice, just want I want to hear. Kind of like saying this rental property I am buing will make me 21% a year, but I am not counting the costs I have to spend to remodel the thing to get it up to code.

Taylor


This is the reason why when management brags about their pro-forma performance, I get antsy. Don't you just hate to see non-recurring events on every income statement? It might not be the same event as the last time but all of them have one thing in common, they cost money!

The only experience I have with Bank of America is that I was most unhappy with their brokerage services. When they bought Fleet they also got Quick & Reilly. I had been using Q&R for several years and I had no complaints. When BOA took over they raised their commission rates and made life difficult for me. Eventually, after I transferred my account to Ameritrade, they told me that they would not service clients in Venezuela. Why they told me this after I had left is beyond me. Maybe it's their way of telling themselves that I didn't really leave, they fired me. If that makes them happy, so be it. :)

Here is another way of looking at BAC: They pay you a good dividend of 4.7% while C pays a little bit less, 4.1%. But while BAC has a 16 year avg CAGR of 12%, C has a much higher 16 year avg CAGR of 26.1%.

This is what that looks like in the long run:

http://finance.yahoo.com/q/bc?t=my&s=BAC&l=on&z=m&q=l&c=c


Denny Schlesinger
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