Stock Analysis

Why Bank of America (NYSE:BAC) has an Attractive Dividend Potential Backed by Variable Rate Loans

  •  Updated
NYSE:BAC
Source: Shutterstock

When looking for dividend stocks, we want to see high performing companies that have the power to both sustain and possibly increase their dividends. Bank of America Corporation ( NYSE:BAC ) seems to pass some of these filters, and today we will analyze its dividend performance.

Part of the companies that will be covered from rising interest rates are banks and financial institutions that have a lot of clients holding variable rate debt. This shields them from rising interest rates and allows them to pass on the rate costs to the loan holders. Bank of America is in a good position to benefit from this because 70.3% of issued loans have variable interest rates, and most of these loans are held by commercial clients.

In the table below, we can see the issued loan structure for BAC:

bac-issued-loan-structure
NYSE:BAC Structure of Issued Loans, March 22nd 2022

While variable loans protect from rate hikes, investors need to be careful because as rates increase it is likely that credit risk also increases and some entities may not be able to pay off their loans. This does not mean that the corporation is at risk, but that there might be factors offsetting future revenue growth.

Now that we have set the picture, we will see how Bank of America performs regarding dividends.

Dividend Analysis

While Bank of America's 2.0% dividend yield is not the highest, we think its lengthy payment history is quite interesting.The company also returned around 7.3% of its market capitalization to shareholders in the form of stock buybacks over the past year.

Some simple research can reduce the risk of buying Bank of America for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Bank of America!

historic-dividend
NYSE:BAC Historic Dividend March 22nd 2022

It seems that BofA has a track record of successfully increasing dividends post 2008, which are well covered by the growth in net income. While the current yield is close to 2% as we mentioned, investors can benefit as the company maintains buybacks and possibly increases dividends in the long term.

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation.As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax.Looking at the data, we can see that 22% of Bank of America's profits were paid out as dividends in the last 12 months.

The company also seems to be in a good position to increase dividends per share, but might be bracing ahead of the uncertainty coming in 2022 and 2023.

Consider getting our latest analysis on Bank of America's financial position here.

Dividend Volatility & Growth

During the past 10-year period, the first annual payment was US$0.04 in 2012, compared to US$0.8 last year.This works out to be a compound annual growth rate (CAGR) of approximately 36% a year over that time.

It's rare to find a company that has grown its dividends rapidly over 10 years and not had any notable cuts, but Bank of America has done it, which is quite good.

Bank of America has been growing its earnings per share at 19% a year over the past five years.Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business.

Conclusion

Bank of America has markers of a company that can withstand future economic hurdles, and sustain their return to shareholders. This is noticed in the fact that a majority of issued credit is with variable rates, which passes on the costs of rising rates to the clients.  

The dividend yield is modest, but shareholders are also part of a stable company engaging in a long term buyback program.

The fundamentals propose that dividends are backed by net income and have been rising as the company grows earnings. The company has an overall good performance on dividends, loan structure, and rising fundamentals.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

Valuation is complex, but we're helping make it simple.

Find out whether Bank of America is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Goran Damchevski

Goran Damchevski

Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors. 

About NYSE:BAC

Bank of America

Bank of America Corporation, through its subsidiaries, provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide.

Flawless balance sheet, undervalued and pays a dividend.