Earlier this week, the Federal Reserve unconditionally approved Bank of America’s 2016 capital return plan as a part of its annual stress test for the country’s biggest banks (see Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again). Following the approval, the diversified banking giant announced plans to hike its quarterly dividends 50% from 5 cents now to 7.5 cents beginning Q3 2016.  The bank will also repurchase $5 billion worth of its common shares over the next four quarters.
Notably, Bank of America had only managed to secure a conditional clearance of its capital plan last year as the Fed took note of “weaknesses in certain aspects of Bank of America’s loss and revenue modeling practices and in some aspects of the BHC’s internal controls.” The fact that the bank admitted to an error in its capital ratio calculation in April 2014 played a role in the conditional clearance, but the fact that things went well with the regulator this time indicate that Bank of America has gotten things in order since then.
Given the bank’s roughly 10.3 billion outstanding shares, the 2016 capital plan entails a payout of just over $8 billion to investors over Q3 2016 – Q2 2017. We maintain our price estimate for Bank of America’s stock at $18.50. While our price target is about 40% higher than the current market price, the primary reason for this is the sharp sell-off in bank shares over recent months in anticipation of the U.K. leaving the European Union as key economic indicators point to weak growth figures in the near future.