Should Investors Purchase Bank of America Stock?

Bank of America has come a long way since its humble beginnings. It has grown from a single branch to over 3,900 financial centers and 15,000 ATMs. It serves over 69 million customers with 57 million verified digital users. 

While primarily serving customers in the U.S., Bank of America also has a presence in more than 35 countries worldwide. As an investor, you may wonder, “Is Bank of America a good stock to buy?” 

In this article, we will review buying Bank of America stock and stock performance so that you can better decide whether an investment is suitable for you.

Overview of Bank of America stock

Bank of America was founded in 1904 as Bank of Italy by Amadeo P. Giovanni in San Francisco, California. It was created to accommodate the financial needs of the city’s growing immigrant population and was one of a handful of banks that survived the San Francisco earthquake of 1906. 

The company officially changed its name to Bank of America and Italy in 1922, primarily serving the Italian American community. The company merged with Bancitaly Corporation in 1928, which owned Bank of America. The company officially changed its name to Bank of America. National Trust and Savings Association and became the first bank in the U.S. to have multiple branches in California. 

The company continued to acquire banks and, in 1998, merged with NationsBank out of Charlotte, North Carolina, to become one of the country’s largest banks. Bank of America acquired Merrill Lynch during the 2008 financial crisis, significantly expanding its wealth management footprint.

Fundamental analysis

The quarterly earnings report and forward guidance are the most influential factors affecting stock price movement. Usually, when a company beats its consensus analyst earnings estimates, it can initially positively affect the underlying stock. The earnings guidance for the next quarter or fiscal year makes the final impact on the stock’s price before the company conference call, which can shed more light on the company’s operating performance. Keep in mind that stocks sometimes react differently than expected. 

For example, Bank of America can beat earnings estimates and raise guidance only to have its stock fall lower. It could happen if the shares made a run-up into earnings, triggering a sell-the-news reaction despite the good earnings report. 

Balance sheet strength

Bank of America has always been known for its balance sheet strength. Its team monitors the bank’s debt levels to stay within manageable limits, allowing it to maintain liquidity and weather any unforeseen financial storms. The bank continues to maintain $859 billion in global liquidity sources.

Asset quality is another area where Bank of America excels. The bank takes great care in managing its loan portfolio to minimize risk. Rigorous credit assessments and risk management provide a solid foundation.

It helps that Bank of America has a diverse revenue stream, offering various financial products and services like consumer banking, commercial banking, lending, wealth management and investment banking. 

Market and industry trends

stock opened at $33.80 in January 2023 and closed at $34.42 at the end of December 2023, up 1.83% for the year. It underperformed the S&P 500 index, which rose 24% in 2023. Core CPI fell to 4% after the Fed pursued aggressive interest rate hikes of 100 bps in 2023.

The Fed backtracked its earlier stance that inflation was transitory or temporary due to the pandemic. Demand spiked for products while supply was light. This resulted from the pandemic lockdowns where factories and production plants came offline to contain the spread of COVID-19. Economies ground to a halt in 2020, and stock prices collapsed.

The spread of COVID-19 vaccinations enabled economies in the U.S. to re-open in the latter half of 2020. However, lockdowns heavily disrupted the global supply chain, causing a shortage of computer chips and leading to an automobile shortage since new cars rely on computer chips. 

The cacophony caused new car prices to skyrocket and caused used car prices to soar higher. The labor market also got tight as restaurants couldn’t find enough workers, and people were job-hopping for higher wages. Stocks soared higher until 2022 when normalization kicked back in again. 

Higher interest rates result in less borrowing since the financing gets more expensive, which causes housing prices to fall in most areas.

As we fast forward to 2023, we see that Bank of America’s stock was trading at $33.12 at the beginning of the year. Since then, BAC stock has increased by 0.2% and is now trading at $33.19 as of December 2023.

Despite the banking industry seeing an average annual earnings growth rate of 12.7%, Bank of America has only achieved 3.5% growth. While the bank’s revenue has also grown at a steady rate of 2.8% per year, its return on equity is only 12.08% and it has net margins of 18.69%. This indicates that Bank of America’s performance has been consistent, but not quite as strong as other banks in the industry.

When evaluating investment returns, differentiate between total shareholder return (TSR) and share price return. TSR takes dividend payments (assuming they were reinvested) into account, as well as discounted capital raisings and spin-offs. Considering this, Bank of America’s TSR over the past five years was 66%, surpassing the mentioned share price return. Much of this can be attributed to its consistent dividend payments.

In its Q3 2023 earnings report, the financial services provider outperformed analysts’ expectations. The company reported quarterly earnings per share of 90 cents, surpassing estimates by seven cents. The quarter brought in $25.20 billion in earnings, slightly above the projected $25.13 billion and showing a 2.8% increase in revenue over the same period compared to last year.

Moreover, the company offers a dividend yield of 2.87%, along with an attractive P/E ratio of 9.8, which draws the attention of value investors. Analysts have given it a “moderate buy” rating and set a price target of $35.54, anticipating a potential 7.2% growth. However, Bank of America’s current earnings growth is negative at 5.454%, which may raise concerns if you focus on growth investments.

Risks and challenges

Risks and challenges associated with investing in Bank of America are multifaceted. Banking faces regulatory challenges, market risks and economic factors. Given Bank of America’s size and scope, it’s subject to stringent regulations imposed by various governmental bodies, including the Federal Reserve, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. 

Banks must spend substantial resources on compliance, which may result in higher operational costs and sometimes decreased profit and growth.

Shifts in regulations for capital requirements, lending or compensation could impact Bank of America’s operations and profitability. Any changes could limit the bank’s ability to generate revenue or increase its expenses, affecting its stock price.

Market risks like fluctuations in interest rates, inflation rates and market conditions also play a role. For example, if interest rates rise rapidly, it could lead to higher borrowing costs for consumers and businesses, potentially reducing loan demand and affecting the bank’s interest income.

Recessions or economic downturns can also present challenges. During economic hardship, loan defaults tend to increase, putting strain on the bank’s asset quality and profitability. When unemployment rates rise, consumers struggle to meet their financial obligations, leading to higher delinquency rates on loans and credit cards.

As a large and complex organization, the bank must figure out how to navigate an ever-changing technological landscape, increased digitization, and the shift away from physical branches. There’s also the threat of cyberattacks and data breaches, which can result in financial losses and erode customer trust and damage the bank’s reputation.

Competition within the banking industry poses a continuous challenge, too. With so many banks vying for market share, BofA must constantly innovate and adapt to stay ahead. Failing this could result in a loss of customers and a decline in profitability.

Bank of America vs. competitors: A comparative analysis

Bank of America sets itself apart from its competitors in many ways. While there is a national trend of closing physical branch locations, Bank of America has the second largest brick-and-mortar branch offices at 3,900 compared to JPMorgan Chase & Co. NYSE: JPM at 4,700 locations. 

Bank of America provides various banking products and financial services for consumer and commercial banking clients, including wealth management and investment banking. The acquisition of Merrill Lynch in 2008 has elevated the caliber of its wealth management, research and investment banking services. 

Bank of America enjoys the reputation of being a reputable and secure money center bank for individuals and companies and a socially responsible and profitable enterprise for shareholders. It was one of the first large banks to embrace digital banking by developing a mobile app. Its digital innovation continued with creating a peer-to-peer funds transfer service, Zelle. 

Zelle enables Bank of America customers and non-customers to transfer funds to each other seamlessly in minutes. It also developed a virtual financial assistant named Erica.  

Dividends and shareholder returns

The dividend yield can be a compelling factor for income investors. A high dividend yield can spark more interest in buying the stock, raising prices and lowering the yield simultaneously. Bank stocks are in a unique situation where the rising interest rates make risk-free money market accounts have yielded more significant than the stock. This could convince investors to open a CD or money market account at Bank of America with no risk to the principal instead of owning Bank of America stock and risk price declines. 

Factors influencing Bank of America stock

Many factors can affect the value of Bank of America stock. You may have heard that a stock’s price represents the future value of the underlying company. There are also periods of disconnect, where the stock may get ahead of itself or fall behind its peers. Here are some factors that can influence Bank of America’s stock price. 

Valuation

The valuation of Bank of America stock compared to its historical levels and industry peers can impact its price. Investors may sell shares to lock in profits if the valuation gets too expensive. Short-sellers may take the opportunity to short the stock due to its overvaluation in hopes of profiting from a sell-off. If the valuation is near the low range, it may present more upside opportunities like undervalued banking stocks. 

Knowing Bank of America’s historical price-to-earnings (P/E) ratio range helps you gauge whether its stock trades near the higher or lower part of the range. Bank of America stock has had an average P/E of 14.39 in the last 10 years. In the past 13 years, it had a P/E ratio of 7.05 to 51.14, with a median of 13.58.

Catalysts for growth

The banking industry is highly regulated. Banks make money by paying depositors 2% interest and charging borrowers 4% interest on loans while pocketing the difference, called the spread, which is part of the bank’s net interest income. 

Dividing the net interest income by the average earning assets calculated the interest margin. Higher net interest margins equate to sustainable profits, dividends and earnings growth. Rising interest rates can bolster net interest margins, a key catalyst for growth. 

Earnings reports and guidance

In its most recent earnings report on October 17, the financial services provider outperformed analysts’ expectations. The company reported quarterly earnings per share of 90 cents, surpassing estimates by seven cents. The quarter brought in $25.20 billion in earnings, slightly above the projected $25.13 billion and showing a 2.8% increase in revenue over the same period compared to last year.

One key factor contributing to Bank of America’s solid earnings was their net interest yield, which improved 5 basis points to 2.11%. It shows that the bank effectively manages its interest rate spread and generates more income from its lending activities.

Another positive sign for investors was that Bank of America’s expenses decreased every quarter, demonstrating its success in controlling costs and improving efficiency.

Overall, strong earnings and a positive outlook should boost investor confidence in Bank of America’s stock and could lead to further price appreciation in the future.

Bank of America in 2024

The Fed’s interest rate policy will impact Bank of America stock and the benchmark indexes. 

The CPI increased 3.1% over the last 12 months, not seasonally adjusted, to an index level of 307.051. According to the U.S. Labor Department, the annual inflation rate in the U.S. was 3.1% for the 12 months ending in November 2023. This is down from 3.2% in October 2023.

Trading Economics predicts that the inflation rate will be 3% by the end of the current quarter.

As the CPI falls, it may nudge the Fed to consider slowing the pace of interest rate hikes and concluding them altogether. The latter may be wishful thinking, with the Fed’s target inflation rate at 2%. 

If inflation falls in 2024, it could be bullish for Bank of America stock and the benchmark indexes. As interest rates fall, Bank of America may see a pickup in loan volume, which can improve both top and bottom-line results. 

Future of investing in Bank of America stock

The future of investing in Bank of America stock will largely depend on industry trends, economic conditions and financial performance, as well as how the bank continues to innovate and expand. Remember that a stock’s current price indicates how the market feels the company will perform in the future. Sentiment has a significant impact on stock prices. 

Positive sentiment from an improving economy and falling inflation can help Bank of America’s stock climb. Negative sentiment from a recession and a credit crisis stoking contagion fears would damage the stock. Note the state of the industry tracking the top finance stocks on MarketBeat.

With a strong focus on innovation and expansion plans, Bank of America has positioned itself as a growth-oriented bank.

In recent years, the bank has embraced cutting-edge technologies to stay competitive. It’s invested heavily in artificial intelligence (AI) and machine learning algorithms to streamline its operations and provide personalized experiences. By leveraging these technologies, Bank of America could revolutionize how customers interact with their financial services.

Another potential growth area for Bank of America is the expansion of its mobile banking services. The bank has already made significant strides here, constantly updating and improving its mobile app to meet the changing needs of its customers.

Investors may see the potential for greater profitability as Bank of America continues to invest in and develop these tools.

Moreover, Bank of America has been proactive in diversifying its revenue streams. They have expanded their offerings beyond traditional banking services, venturing into wealth management and investment banking. This move allows them to capitalize on multiple sources of income and mitigate risks associated with fluctuations in interest rates.

Is Bank of America too big to fail?

After the 2008 financial crisis, regulators made sweeping changes for large banks in the U.S. Bear Stearns’ implosion and Lehman Brothers’ fall had investors wondering, “Are bank stocks safe?“

The Dodd-Frank legislation created the Consumer Financial Protection Bureau (CFPB) to help consumers against abusive and predatory financial products and practices. Smaller regional banks under $100 billion of consolidated assets were subject to only some of the large banks’ legislation. The Volcker Rule restricted banks from proprietary trading and clamped down on private equity and hedge fund investments. It improved upon capital and liquidity requirements and heightened supervision and regulation. 

Basel III is a set of international regulations that include higher minimum capital requirements like higher common equity tier 1 (CET1) capital, the addition of liquidity coverage ratios (LCR) and net stable funding ratio (NSFR) to ensure adequate liquidity for banks to be able to cover short-term and long-term obligations. The Fed conducts annual financial stress tests for large banks and publishes its results for customers and investors. Bank of America is arguably a bank that still qualifies as “too big to fail” since it’s the second-largest bank in the country. 

FAQs

Here are some answers to frequently asked questions. 

Will Bank of America stock go up?

Bank of America stock can go up or down. It depends on your entry price, investing time frame horizon, market conditions, earnings reports and forward guidance. A recession would not be good for Bank of America stock, but the stock market has recovered from every single recession in the past to reach new highs. Consider this information when considering “Is Bank of America a buy?” 

Is Bank of America a good stock to buy for the long term?

Still wondering, “Should I buy Bank of America stock?” Bank of America stock can be a good buy for the long term depending on your entry price and market conditions. Historically, the stock market, in general, has appreciated. If inflation stays under control without heading into a recession, it could be bullish for Bank of America stock. 

Consider diversifying with other finance and insurance stocks on MarketBeat. Check with a registered investment advisor for more insights if you still wonder, “Is BAC a good stock to buy?”

Is Bank of America a good investment?

Is Bank of America stock a buy? 

Bank of America stock can be a good investment depending on your entry price and holding time horizon. Historically, Bank of America stock has a five-year performance of down (1.4%), but its 10-year performance is up 154%. While historical performance does not indicate future performance, stocks have a history of repeating price actions and patterns. 

Read its recent quarterly earnings report and check its weekly candlestick chart to gauge its current price trend. 

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