Why Bank of America (BAC) Canceled Its Dividend Hike - Real Time Insight

It has been rough going for big bank stocks over the past few weeks as mixed earnings and economic uncertainty have hit this once surging sector hard. This trend is especially apparent for Bank of America BAC as the bank has lost over 5% in the past month while it missed pretty badly in its most recent earnings report, putting up a loss of five cents a share compared to an estimate of a five cent per share profit.

Despite this miss, the company was looking to boost both buybacks and dividends in order to sweeten the pot a bit for shareholders. Plus, BAC had recently passed Fed stress tests, and undoubtedly BAC is looking to get back to being more of an income play again, though that is obviously still a long ways off.

These plans might be on hold for now though, as BAC just revealed that it has miscalculated its level of capital following its purchase of Merrill Lynch in 2009. As a result of this miscalculation, the firm had to adjust its capital ratios downward, while it must also resubmit its capital plans within 30 days.

This also means that BAC's plans to offer up a $4 billion stock buyback program, as well as its initiative to boost its quarterly dividend from one cent a share to five cents a share is on hold until it receives new Fed approval. "Until receiving notice that the Federal Reserve has not objected to the new capital plan, Bank of America will not be able to increase its capital distributions, including those increases approved during the (stress tests)," the Fed said according to a CNBC article.

Stock Impact

Thanks to this new wrinkle of uncertainty, shares of BAC were sharply lower in Monday morning trading. Shares had fallen by about 5.3% at time of writing, while volume was well above normal, and was actually in excess of what SPY was seeing on the day.

The move also continued the trend lower for BAC and the pessimism trickled into other banking stocks as well. While many of the larger banks like Citigroup C and Wells Fargo WFC were relatively unscathed, smaller banks like Bank of New York Mellon BK and PNC PNC were down more than 1% on the day. Still, this was pretty much a BAC exclusive issue, and given some of the recent earnings estimates for Bank of America, there may be more trouble ahead for the stock beyond this problem.

Other Factors

Investors should note that we currently have a Zacks Rank #5 (Strong Sell) on BAC and that we were already looking for underperformance from this banking giant before this debacle hit the news wires. The reason for this low rank stems from a flurry of analyst estimate revisions lower in the past month, as nearly all of the most recent estimates have been to the downside.

In fact, for the current quarter, 2 estimates have gone higher in the past 30 days compared to 11 lower, while for the current year time frame, not a single estimate has moved higher while 19 have gone lower. This has led to a huge reversal in the current year's consensus EPS estimate over the past month, as this has moved from $1.34/share a month ago to the current level just under one dollar (99 cents) per share.



Clearly, the near term outlook for BAC stock isn't looking that great, and that is especially true following BAC's capital miscalculation which added a fresh layer of uncertainty to the stock. Still, BAC does look to likely pass the stress tests following the new submission to the Fed as the new data didn't push their capital ratios down that far.

In fact, the company said that estimated Basel 3 tier 1 capital ratio was down just five basis points, while the tier 1 capital ratio was revised down 21 basis points, and the total capital ratio was revised lower by 21 basis points. These aren't huge moves so BAC should still be able to pass regulatory hurdles and then reconsider its buyback and dividend hike once more.

Investors should thus look for BAC to hike dividends and buybacks in a bit more time, though one cannot say for sure if this is the end of the issues for Bank of America stock. After all, even if BAC gets its capital issue sorted out and can hike its dividends, estimates have been falling like a stone for BAC and more weakness could definitely be ahead for this banking giant.

But what do you think?

Can BAC turn things around after this embarrassing miscalculation? Or is more pain ahead for this stock even if it boosts dividends and does its share buyback program as planned?

Let us know in the comments section below!

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