1 Reason Bank of Americas Stock Price Is Still So Low

By John Maxfield Markets Fool.com

Bank of America lowered the bar on its stock price in 2009. Image source: iStock/Thinkstock.

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If you compare Bank of America's (NYSE: BAC) stock to the other global systemically important banks in the United States, one thing sticks out: Bank of America's share price is significantly lower than all of the rest.

It costs a little less than $23 to buy a share of Bank of America, and that's after the post-election surge in bank stocks. Meanwhile, even the second least expensive big bank stock, Morgan Stanley (NYSE: MS), costs more than $43 per share.

Given that Bank of America is the second biggest bank in the United States, what explains this?

Bank

Price per Share

Average Diluted Shares Outstanding (millions)

Goldman Sachs

$241.39

430

JPMorgan Chase

$86.74

3,630

State Street

$78.96

393

Citigroup

$60.78

2,880

Wells Fargo

$55.77

5,095

Bank of New York Mellon

$47.58

1,068

Morgan Stanley

$43.37

1,879

Bank of America

$22.64

11,000

Data source: YCharts.com.

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Why B of A's share price is so low

The answer is that Bank of America has way more shares outstanding than any other bank. It had an average of 11 billion shares of common stock outstanding in the third quarter of this year, according to YCharts.com.

That compares to five billion outstanding shares at Wells Fargo, 3.6 billion at JPMorgan Chase, 2.9 billion at Citigroup, and 1.9 billion at Morgan Stanley, to cite the four other big banks with the most outstanding shares.

This means that Bank of America's book value must be divvied up across a much larger number of shares than close competitors such as Wells Fargo, JPMorgan Chase, and Morgan Stanley. This dilutes the amount of book value that each share of Bank of America's stock lays claim to.

It accordingly follows that because a bank's share price is largely a function of its book value per share, Bank of America's stock will invariably trade for a lower price than its peers so long as it has so many more outstanding shares.

How this happened

Bank of America wasn't always in the situation. Going into the financial crisis, Bank of America had between four and five billion shares of outstanding common stock. That's roughly half its current count.

Data source: Bank of America. Chart by author.

Most of the increase came in 2009, when Bank of America issued upwards of five billion new shares of common stock in order to acquire Merrill Lynch and to raise capital to survive the crisis.

  • It issued 1.4 billion shares in January 2009 to fund the Merrill Lynch acquisition.
  • It issued 2 billion shares in the second quarter of 2009 to raise capital.
  • And it followed this up by issuing 1.3 billion shares more at the end of the year to raise funds to pay off its TARP funds.

Consequently, even though Bank of America has turned the cornerand largely left the 2008 crisis in the rearview mirror, the bank's missteps in the lead-up to the downturn continue to be reflected in its share price today.

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John Maxfield owns shares of Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.