U.S. stocks are slightly higher in late morning trading on Thursday, with the Dow Jones Industrial Average and the S&P 500 up 0.31% and up 0.28%, respectively, at 12:45 p.m. EST. Shares of Bank of America Corp are outperforming, up 1.20%.
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Half an hour before today's market open, the Federal Reserve announced in a press release that "it has not objected to the resubmitted capital plan from the Bank of America Corporation."
Here's the background on this headline: Since 2011, the largest bank holding companies have had to take part in an annual exercise named the Comprehensive Capital Analysis and Review. The CCAR is commonly referred to as the "stress tests" because participating banks must submit their assessment of the impact of a potential period of economic and financial stress on their capital levels.
On the basis of these assessments, the Fed evaluates whether the banks' capital distribution (i.e., dividends and share repurchases) are reasonable. Keep in mind that any capital a bank returns to shareholders is capital that is no longer available to protect against losses when it is under duress.
Today's announcement from the Fed on B of A's "resubmitted" capital closes an embarrassing episode for the bank: In March, it was the only U.S. bank that was required to produce another capital plan "to address certain weaknesses in its capital planning processes."
Unfortunately, that was not an isolated incident. In 2014, B of A scrapped plans to increase its dividend and share repurchases because it found errors in the calculation of its capital ratios.
Between these setbacks and the fact that Bank of America was much more grievously wounded than JPMorgan Chase & Co. and Wells Fargo & Co, the evolution of dividends at the three institutions has diverged in the wake of the financial crisis:
As the above graph shows, whereas JPMorgan and Wells Fargo have been allowed to raise their dividends consistently since 2011, Bank of America had to wait until mid-2014 to raise its dividend for the first time from a nominal $0.01 to...$0.05.
(What the graph does not show is that total dividends per share at B of A's rivals finally exceeded their 2007 high mark in 2014.)
That divergence has naturally affected dividend yields:
You can see that the dividend yields shot up as the financial crisis progressed -- above 40% in Bank of America's case -- as bank share collapsed and investors expected banks to cut or suspend their dividends. The inevitable occurred, helping dividend yields to normalize somewhat -- though much below pre-crisis levels.
Finally, with increasing distributions, JPMorgan's and Wells' dividend yields have significantly outpaced that of B of A -- to the tune of a more than two-to-one ratio between them.
Today's news means "America's bank" (in the words of super-investor Bruce Berkowitz) is one step closer to closing that gap. B of A shareholders should look for a substantial increase in the dividend following the outcome of next year's CCAR, in March.
The article What the Fed's Announcement Means for Bank of America Shareholders originally appeared on Fool.com.
Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short January 2016 $52 puts on Wells Fargo. The Motley Fool recommends Bank of America. 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.
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