Bank of America: Growth, income - and safety, too
The bank - on track to be the nation's largest - pays a high dividend yield and is also a timely choice for long-term gains.
NEW YORK (Money) -- Where can you get a 4.3 percent yield, long-term capital gains and some downside protection in case the economy stumbles next year? Look no further than Bank of America.
The stock has long been one of the highest-yielding of the big banks and currently pays 4.3 percent. And in fact, Bank of America remains an attractive choice for conservative income investors purely on the basis of current yield.
But there's a lot more to the story. Bank of America has been expanding robustly and may well soon become the largest U.S. bank.
The company has been an aggressive acquirer domestically. Today, it includes the former NCNB, C&S/Sovran and FleetBoston Financial, as well as BankAmerica.
At this point, Bank of America (Charts) is so large that it is running up against various constraints against further domestic banking acquisitions. As a result, the company is expanding in related areas.
On Jan. 1, the company completed its acquisition of MBNA, which will make it the No. 1 issuer of credit cards.
In addition, B of A is expanding its role in securities trading, offering free stock trading and becoming more active in stock options trading.
Perhaps the most important arena for expansion is banking overseas, where B of A trails some of its competitors. The bank has already made some small strategic acquisitions and was recently rumored to be interested in acquiring Barclays.
All of these bold moves offer the potential not only to boost revenue and assets under management but also to permit cost cutting. As a reaction to these possibilities, the market capitalization of Bank of America surpassed that of Citigroup (Charts) for the first time last month.
In the final analysis, however, profitability depends on the level of short-term interest rates relative to long-term rates. And profit margins at all the big banks have been badly squeezed as the Federal Reserve has pushed rates higher over the past couple of years.
Even so, Bank of America managed to post a 24 percent gain in earnings per share for the third quarter. The stock price, however, is still deeply depressed because shareholders are worried about a possible economic slump.
No one expects that Bank of America will turn in equally big earnings increases in 2007. Most forecasters are projecting single digits. But there is some good news - the profit margin squeeze is most likely about as bad as it's going to get.
So even if the economy is disappointing next year, the shares probably don't have much room for a further decline. And the current 4.3 percent yield certainly provides important share-price support.
Whatever the Fed does at Tuesday's meeting and whatever explanatory comments are released, interest rates are likely to ease before too long. Indeed, Fedwatchers are already speculating about when the first rate cut will occur.
The bottom line is that investors buying Bank of America today not only get a very cheap stock. The price is likely to be supported by the current low 10.7 P/E ratio, based on estimated earnings for 2007, and also by the fat 4.3 percent yield.
Once the interest-rate environment begins to improve - very likely within the next 12 months - the stock should be capable of turning in some impressive capital gains, as well. All in all, it's quite an attractive package.
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