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BofA Hikes Dividend 400%, Nears Record MBS Settlement

Zacks Equity Research

Much to the delight of investors, Bank of America Corporation (BAC) has increased the quarterly common stock dividend from 1 cent per share to 5 cents. The new dividend will be paid on Sep 26 to shareholders of records as of Sep 5. This four-fold hike in dividend marks the first increase in quarterly common stock dividend by the Bank of America (BofA) in seven years.

It indicates that the bank has been able to to bolster its balance sheet as well as capital and liquidity positions. Added to this, BofA has nearly struck a landmark settlement deal of $16 billion – $17 billion with the U.S. Justice Department to clear the probes into the sale of faulty mortgage-backed securities (MBS.V) that fueled the financial crisis. Though this deal involves huge costs, but if finalized, it would obliterate the litigation muddle that had been surrounding the bank for quite some time.

In more recent times, BofA has been able to consolidate its capital and liquidity position, and on May 27, 2014 it resubmitted capital actions as part of the 2014 Comprehensive Capital Analysis and Review (CCARF) process. The resubmitted capital plans included a hike in the common stock dividend, but no buyback activities. This time, The Federal Reserve Board has not objected to the proposed capital actions. (Read: BofA Gains on Resubmission of Capital Plan)

Along with this, per the proposed settlement deal, the bank would pay around $9 billion in cash penalties to federal government, states and other government entities, and the rest in mortgage modifications and consumer relief to settle federal and state claims.

If materialized, this settlement deal would be by far the largest among the billion-dollar deals of the big banks over the selling of shoddy MBSs. It would also overshadow the $13 billion deal struck in November last year between the Justice Department and JPMorgan Chase & Co. (JPM) over the sale of faulty MBSs before the financial crisis. Citigroup Inc. (C) settled similar types of claims last month for $7 billion.

Nevertheless, if this settlement is reached, it would clear a legal hangover that has engulfed BofA in recent years. Though this settlement may prove to be costly for the bank on an immediate basis, it may fetch ample long-term accolades. Moreover, the 400% hike in dividend, and that too after a long hiatus of seven years, must have cheered investors up. Already, their optimism has been reflected in the 1.3% rise in the shares.

Currently, BofA holds a Zacks Rank # 3 (Hold). Capital One Financial Corp. (COF) is a better-ranked bank carrying a Zacks Rank #1 (Strong Buy).

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