Up more than 35% so far this year, does Bank of America (BAC) stock have room to climb? Or does recent volatility signal a reversal to the rebound of the money center bank’s shares?
Recent talk by the U.S. Federal Reserve about raising rates sooner than expected in order to combat inflation, may have markets worried. Specifically for banks, the additional flattening of the yield curve is a near-term concern as well. However, a “return to normal” for interest rates bodes well in the long-term for the sector.
There is another factor that could boost Bank of America shares. A few months back, the Federal Reserve announced that it planned to roll back last year’s COVID-19 stress test restrictions on buybacks, as well as the caps on dividends. (See Bank of America stock chart on TipRanks)
Put both factors together, and investors may still be willing to dive into this stock, which has been a successful recovery play since last fall’s vaccine rollout. They may see the latest pullback as an opportune entry point.
BAC Stock and Raising Interest Rates
Will faster-than-expected changes to the Fed’s near-zero interest rate policy help or hurt Bank of America stock? After the central bank’s remarks on June 17, financial names saw an immediate dip in price.
BAC stock itself fell 4.37% that day on the news, extending its losses the following day with another 2.56% drop. In theory, an increase in interest rates is a positive, as it has an outsized effect on NII (net interest income).
However, the opposite can happen, if short-term rates rise faster than long-term rates (what’s known as a flattening yield curve). Currently, that's what is playing out, as the market shifts from betting on runaway inflation, to betting on the Federal Reserve combating it. Yet, this may be only a near-term issue.
As the Fed slowly reverses course on its pandemic-driven changes to monetary policy, long-term rates will move up in tandem with rising short-term rates. Due to this (and another key reason, explained below), investors will likely remain bullish on banking plays like BAC stock.
Return of Capital Could Extend This Stock’s Recovery Rally
It may take time for rising interest rates to help Bank of America’s bottom line, but there is another factor that could help shares extend their pandemic recovery rally. That would be the ramping back up of its return of capital (increased dividends, share repurchases) efforts.
At the start of the COVID-19 outbreak, the Federal Reserve limited dividends, and ordered a moratorium on stock buybacks for big banks. Even as the sector wound up being resilient during the crisis, the Fed has yet to reverse these policies. Once it completes its annual stress tests, it may do so in the coming month.
BAC stock could be a name that gets some of the greatest benefit from this change. That is because when factoring in its current low payout ratio (percentage of earnings paid out as dividends), it has plenty of room to increase its quarterly dividend payout.
As for share buybacks? Once the moratorium is lifted, Bank of America will be able to buy back as much as $25 billion worth of outstanding shares. That equates to around 7.5% of its current market. This, coupled with a boosted dividend, plus a possible increase in profitability, could result in a continued upwards movement for its shares.
What Analysts are Saying About BAC Stock
According to TipRanks, BAC stock has a consensus rating of Strong Buy. Out of 13 analyst ratings, 10 rate it a Buy, 3 analysts rate it a Hold, and 0 analysts rate it a Sell.
As for price targets, the average Bank of America analyst price target is $45.27 per share, implying around 8.77% in upside from today’s prices. Analyst price targets range from a low of $37 per share, to a high of $52 per share.
Bottom Line: Investors Likely to Remain Bullish, Despite Overall Market Jitters
Flattening yield curves may be a near-term concern for Bank of America. As it becomes clearer that the Federal Reserve is going from dovish to hawkish with regards to interest rate policy, long-term rates will again move in the right direction.
This gives Bank of America potential for increased earnings down the road. Coupled with the high chances of a raised dividend, plus the return of share buybacks, investors may not remain skittish about BAC stock for long.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.