After Bank of America (BAC) reported 19Q3 earnings this week, there were some discussions on Seeking Alpha by commenters arguing for the benefits of sustained low share price for the bank. Naturally, this seemed to confuse at least one poster, and this topic has been running in the background on several online conversations.
On the surface, it seems sort of odd, doesn't it, for shareholders to actually desire LOWER prices for their portfolio positions? Don't investors want the shares to rise? Ultimately, probably yes, but I think what this discussion shows is the heterogeneity of shareholder objectives in a public company. Marty Whitman talked about this idea at length, and expressed a view that one of the biggest mistakes that academic finance has made (and reflected in law and regulation) is the substantial consolidation of the firm and the shareholders. He had a rather intelligent understanding of the various stakeholders in a firm and a Venn Diagramm-like view of overlapping communities of interest and opposition (and presumably indifference, although he didn't explore this to my knowledge).
So what is the deal with BAC and shareholders happy to have lower prices? Well, I think it depends heavily on when you bought your shares and what you think you are doing with that investment. There are many retail investors - the sort of people who post comments on SA - who purchased these shares some time ago. Many purchased them in the 4th quarter of 2011, after Warren Buffett got 700mn options at $7.14 and the share price, after a brief spike, subsequently crashed to a low of $5 in early December of that year. Much of this 4th quarter move appears to this writer to have been tax loss selling, as the minute 2012 came rolling around, the shares went on a run to $12 in a matter of weeks. I digress.
The point is, if you loaded up as a retail investor in late 2011, you were probably thinking that the bank was not on death's door, although it was price as though this was the case, and that eventually the business would be capable of generating solid profits per share and paying large dividends. Eight years later, that reality has come to pass.
At this point, if you are that sort of retail investor, you may be doing this sort of math: this stock is a cheap pension. Let's say you purchased 10,000 shares of BAC at an average cost of $7. You might have done much better than this, but let's not push the envelope too far. Looking out to 2021, you can reasonably expect the dividend to reach $1 and rise from there. If 50% of the 2019 shares can be bought in by 2031, not unreasonable if the company gets a few more years of being able to net repurchase 10% of the shares out and then steadily works at a mid single digit net repurchase rate, EPS should rise to something on the order of $6 a share without any organic growth. If the dividend rate were to rise to around 50%, you could be looking at a $30k pension 20 years after the investment of $70k. Moreover, just taking the expected returns from 2021 (of $10k - $1 per share on 10k in shares), you would have expected to receive $100k back on your initial investment BEFORE getting at $30k rising annuity pension. This probably understates the capital return because it is unlike to remain at $1 for ten years before rising to $3. If it advanced linearly over the 10 year period, the average would be $2 per share, good for a $200k return, or 3x the initial investment while STILL holding that investment and being entitled to the same $30k rising annuity pension.
This ignores the dividends likely to be paid between 2016 and 2021, which are good for a couple dollars per share in total.
Moreover, if the bank is able to increase earnings through cost control and a slow growth of the balance sheet and a slow shift toward greater tangible value (assuming intangibles remain stable) perhaps total earnings might grow 50% over the period, enabling EPS of $9 per share (good for an earnings yield on cost of well over 100% per annum) and a payout closer to $45k.
Compare that to Social Security, where an upper middle class earner can be expected to contribute over $12k per year (don't forget, employees pay the employer half of the the 12.4%) for 40 years ($480k) to have a similar pension. The difference is, the BAC investor, who might have been a typical GenX 35 year old in 2011, paid MUCH less, doesn't have to wait to 67 to collect - his 30k BAC "pension" is available at 55 after returning 2-3x his initial investment. He gets to collect for 12 more years - worth a stunning $400-$500k more, not to mention the ongoing rise in his income thereafter (his annuity at 67 will be much much higher than Social Security). Finally, unlike an insurance annuity, this investor retains ownership over the principal which is likely to be capitalized at some 20x-25x the dividend payout. $700k-$1.2m in 2031 will be worth less than at present, but this is a simply massive return.
But a not considerable amount of this return is based on teh ability of the bank to repurchase shares cheaply, which, so far, the market has allowed for.
I get that it is frustrating. If a significant portion of your portfolio is invested in BAC, then you have not seen that portion of your brokerage statement drive a result since 2017. If you are being paid to manage money and have promised investors that you will beat the market over certain time periods, you may find it difficult to hold BAC even as it gets objectively cheaper.
There are also risks, not least of which is credit quality and other macro factors like interest rates. Then there are the fintech firms that are looking for ways to reduce the dependence on the centralized ledgers of banks and the permissioned system of transaction verification. These could be near mortal threats to the fees that banks are able to charge for operating the payments system. Though in the end someone has to perform the underwriting functions associated with credit and banks are likely to continue to do that better than most other firms.
BAC has several other attractive features - among them the fact that it cannot do acquisitions for additional US deposits. When I first purchased BAC shares, this was a major highlight for me. Alas, it did not prevent the acquisition of Countrywide. Inasmuch as countrywide was an effort to get more control over the creation and marketing of mortgage backed securities to improve the position of BAC investment banking (the old Credit Suisse First Boston securities business that BAC acquired with BankBoston, but which they struggled to grow into a bulge bracket bank - not for lack of trying), it was also a deal that could be done that avoided the deposits question. Such a deal could be done again (let us hope that it will not be). BAC has the option to enter foreign markets with retaail banking, but they can wait for a very favorable time.
For these reasons, I have not sold BAC shares in some time, although obve $30 and in particular above $35 I think that the price to tangible book suggest that it might be time to trim. But then I think, hold onto your shares (I have trimmed from my 2011 position becuase BAC was getting to be too large and becuase there were other things to purchase and finally because I perhaps lost sight of some of this along the way. I believe that a few stocks like this are the key aspects of having a strong portfolio. Knowing, as an investor, that you will not be destitute, provides you with much more leeway to pursue more speculative positions that have high risk reward characteristics.
The longer the stock remains cheap - so long as management remains committed to repurchases - the faster and more likely it is that the scenario outlined here will be a success.
