This week, we find out about how banks have fared on the stress tests to which they are being subjected by the US treasury. In an interview a few days ago, Brian Moynihan, CEO of Bank of America indicated that the banks would be shown to be fine, even under extreme conditions (including unemployment of 20% with the related cases of default).
Today JP Morgan demonstrated that they are in the strongest position of all of the US banks by announcing a dividend hike and a massive buyback, equivalent to almost 10% of their market capitalization. With a payout ratio of 25%, JPM appears to have lots of room to increase the amount of its dividends go forward.
I believe that BAC is in a similar position, even though operational changes have allowed Chase to take over leadership in branches, I firmly believe that BAC is a stronger franchise. (I cannot believe that I am saying this given that J. Pierpont Morgan is a personal hero).
By 2013 BAC will also be paying a dividend and buying back some of the nearly 11bn shares outstanding. The stock, which had a nice rally today, will trade at $16-20. Even with the rally since December, the stock is well positioned to post nice gains over the next 12-24 months. This is why I am very long the stock, it is by far my largest position.
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