Bank of America's CEO Just Answered an Important Riddle for Shareholders
By one fundamental measure of performance -- net income -- Bank of America (NYSE: BAC) had its second best year ever in 2016, with earnings of $18 billion. But by another important metric -- earnings per share -- the North Carolina-based bank's performance last year was less sanguine, down two-thirds from a decade ago.
These two data points don't seem to make sense. After all, a company's earnings per share is calculated by dividing its net income by its outstanding shares of common stock. If Bank of America's net income last year was one of its best in history, then shouldn't its earnings per share be among its top performances, too?
Theoretically, the answer to this question is "yes." In Bank of America's case, however, the answer is obviously "no."
Data source: YCharts.com. Chart by author.
How should one go about reconciling this contradiction? As Bank of America Chairman and CEO Brian Moynihan explained in his latest annual letter to shareholders, which is at the beginning of the bank's 2016 annual report here, the answer has to do with the bank's outstanding share count:
What Moynihan is referring to here is that Bank of America's share count exploded in the wake of the financial crisis, going from 4.6 billion shares of common stock outstanding all the way up to 11.6 billion shares, after factoring in the impact of options to purchase Bank of America stock like those held by Warren Buffett's Berkshire Hathaway.
Image source: The Motley Fool.
The explosion traces its roots to three sources. First, Bank of America had to raise capital to offset the nearly $200 billion worth of losses it suffered during and after the crisis. Second, it issued stock to purchase Merrill Lynch in 2009 (though the deal was announced in 2008). And third, it issued stock to repay the government's injection of capital into Bank of America under the crisis-era TARP program.
The net result is that Bank of America's earnings are now spread among more than twice as many shares as a decade ago, which solves the riddle of why its performance last year looks so much better if you focus on net income as opposed to earnings per share.
10 stocks we like better than Bank of AmericaWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Bank of America wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017
John Maxfield owns shares of Bank of America. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.