Retirement Strategy: Why Is Bank Of America In TARP II?

I’ve been getting some feedback as to why I would place Bank of America (NYSE:BAC) in the heart of the new model portfolio. Let me remind you that I have been a BAC bull for a few months now and have been pounding the table about its growth potential. Read this piece for a little background.

As most of you know, I personally own a bunch of shares, model portfolio TARP has plenty of shares, and now it is tucked away with a starting position in TARP II. I am considering adding more shares for myself as well as for TARP II.

Many dividend growth investors will turn their collective noses up at the 2.00% yield as it just would not throw off enough income immediately. Well, the two reasons NOT to have purchased BAC when I started yakking about it were as follows:

  • BAC does not increase its dividend by 60%.
  • Buffett changes his mind and dumps 700 million shares of BAC stock.

Well, both of these risks were eliminated when BAC announced its intention to increase its dividend and Buffett quickly decided to exchange his warrants for 700 million shares. Risk off, right? Now shareholders were going to get a nice pop in the dividend, even with its small yield, and also have Warren Buffett as the largest single shareholder! Nice company to be with I would say and the information was given to all of us well before everything happened! So IF you bought the shares when I first started talking about it, this is where you would be in both growth and income: about 10% capital appreciation and a dividend increase of roughly 60%. Not bad for a few months of waiting right?

Now There Are Even More Reasons To Consider BAC

First, review this article, then let’s take a quick look at the new model TARP II chart as it stands now:

The new model TARP II consists of the following stocks as of today: Altria (MO), PepsiCo (PEP) Hormel (HRL), Lowe’s (LOW), Lockheed Martin (LMT), Williams-Sonoma (WSM), Realty Income (O), Omega Healthcare (OHI), LTC Properties (LTC), Community Healthcare (CHCT), Apple (AAPL), Gilead (GILD), Walgreens Boots Alliance (WBA), Visa (V), Microsoft (MSFT), Novartis (NVS), Bank of America (BAC), AT&T (T), Facebook (FB), NextEra Energy (NEE), Consolidated Edison (ED) Qualcomm (QCOM), and Bed Bath & Beyond (NASDAQ:BBBY)

Since the price of BAC was $ 24.38/share when added to the model, the price as of right now is $ 25.16, so an increase of about 4-5% in value has been added and that 2.10% yield is now down to 1.96%. Not to worry, though; there is more good news to come, AND we have 20+ years to let this stock “bake”. If we avoid another banking crisis, who knows, BAC might become a dividend champ, but in the very least, we can dump it and move the dollars into a dividend aristocrat eventually!

The reasons I am even more optimistic about the share price appreciation are quite simple.

1. A probable Moody’s credit rating upgrade:

The bank’s A1 rating has been put on review for upgrade at Moody’s, with the agency noting improvements to profitability and management’s commitment to a conservative risk profile.

Moody’s also likes Bank of America’s more conservative than peers capital return policy (shareholders may feel differently).

2. The Fed becoming more hawkish than everyone expected, so another rate hike is likely this year, and the Fed’s balance sheet will be trimmed:

Taking a closer look at the economic projections, core PCE inflation is seen at just 1.5% this year, down 20 basis points from the June guess. Inflation is seen at 1.9% next year, down from 2% previously.

The median forecast for the Fed Funds rate at year-end stays at 1.4%, suggesting one more rate hike is in the cards. The median for 2018 is still 2.1%, pointing to roughly three rate hikes next year. 2019 is lowered to 2.7% from 2.9%.

Yields have moved a bit higher since the news hit, with the 10-year yield up 2.75 basis points to 2.276%. TLT -0.3%, TBT +0.6%. The two-year yield has risen to 1.43, its highest since July.

Gold (NYSEARCA:GLD) has lost a few dollars per ounce, now flat on the session at $ 1,311.

The dollar (UUP +0.4%) has strengthened a bit. …

… balance sheet trim starts in Oct. (Sept. 20)

The markets have been sloppy this last week, but BAC moved higher, which is normal when interest rates are set to rise, and lending becomes more profitable. As far as I am concerned, capital appreciation has just begun.

OK, So How About Dividend Growth

This is sort of easy as well. Let’s just look at the basic metrics:

It isn’t that much of a stretch to say BAC will more than likely continue growing the dividend, so getting in when the share price is reasonable will give the yield a kick every time the bank announces a dividend increase. Obviously, I have no idea what the amount of the dividend might be in 20 years, but even if it just doubles to around $ 1.00 annually, at a share price of roughly $ 25, the yield on cost would be a rather sound 4%! Of course, if we wait and the share price rises even more before we add more, then that YOC would be lower. Given the fact that the stars seem to be aligned with the Fed, and the bank is making lots of money, tell me why I shouldn’t add more shares to TARP II, as well as my own personal account!

Look at these fundamentals:

It is VERY undervalued according to S&P Capital, as well as being EXTREMELY financially healthy. I like to get in BEFORE those 2 other metrics move higher, and I like riding the coattails of Warren Buffett!

Growth is headed in the right direction as well as cash flow (great for larger dividend raises) and even book value is up. It sits at $ 27.43/share as of June 30th, so in all likelihood that metric has ticked up a bit Let me be conservative and say it’s now about $ 28/share. That translates into a growth potential of 11-12%, and it will possibly happen sooner than later because of the rising interest rates. Rising interest rates mean rising profits on loans at higher interest rates. That spells EPS, earnings per share, which keeps the upward trend going our way!

The Bottom Line

I might not be the sharpest knife in the drawer, but I think buying more shares of BAC makes sense. I would really like to know the reasons YOU have for NOT owning BAC here. Convince me I am wrong!

Not To Bore You, But…

Knowledge is power, and many folks shy away from the investing world because that very world makes it more confusing each and every day in an effort to sell you something: stock picks, technical strategies, books, videos, subscriptions with “secret ideas,” gadgets, and even snake oil.

My promise to you is that my work here will remain free to all of my followers, with the hope of giving to you some of the things that took years for me to learn myself. That being said, let me reach out to you with my usual ending:

**One final note: The only favor I ask is that you click the “Follow” button so I can grow my Seeking Alpha friendships. That is my personal blessing in doing this and how I can offer my experiences to as many regular folks as possible, who might not otherwise receive it.

Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. The long positions held are based upon what the model portfolio holds and I personally could have held all of the stocks noted at one time or another.


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The portfolio is for educational purposes only, and not an actual portfolio. The long positions are based on the model portfolio.