The per-share book values of Bank of America and Citigroup plummeted after the two banks issued new shares at steeply discounted valuations during and after the financial crisis. BAC Average Diluted Shares Outstanding (Quarterly) data by YCharts .
The point being: Bank of America has proven that it's an irresponsible steward of capital above and beyond what it needs to responsibly operate its business. CEO Brian Moynihan admitted as much in a 2011 interview with Fortune 's Shawn Tully (emphasis mine):
In explaining his current strategy, Moynihan divides the future into two main periods. Over the next two years, he says, Bank of America will retain virtually all its earnings to build the funds necessary to comply with the new Basel III international standards of capital requirements for financial institutions, which are anticipated to be stringent. [...]When BofA has built up a sufficient capital cushion, probably two to three years from now, Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets.
Importantly, however, my opinion that Bank of America should increase the amount of capital it returns to shareholders -- pending the Fed's approval -- doesn't mean that it should increase its dividend. The right answer is instead to scale up share buybacks as much as the Fed will allow, as Moynihan intimated above.
If you look at the most successful CEOs over the past 50 years, as Thorndike does in his book, you'll see is that they almost universally preferred buybacks to dividends. This was particularly true when the shares of their companies' stocks traded at historically low valuations.
The late Henry Singleton, founder and CEO of Teledyne from 1961 to 1990, bought back 90% of his company's stock between 1972 and 1984 for an average price-to-earnings multiple of 8. For context, the average stock on the S&P 500 currently trades at 23 times earnings, or nearly three times as high.
Singleton was the "Babe Ruth of repurchases," wrote Thorndike. "No one has ever bought in shares as aggressively," noted Berkshire Hathaway's Munger.
It's here, in turn, where Bank of America's most immediate opportunity to increase shareholder value lies. Its shares trade right now for a 27% discount to book value, roughly in line with its tangible book value. That makes it the second cheapest big bank stock after only Citigroup. By buying back its own stock, then, Bank of America will be essentially exchanging three quarters ($0.73) and getting a dollar in return.
You can't beat that math. "They haven't repealed the laws of arithmetic ... yet, anyhow," observed another famous capital allocator, Liberty Media 's John Malone.
This is presumably why Bank of America's Moynihan seems to prefer buybacks to dividends . But whether he can convince his management team and board is another question entirely.
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The article Why Bank of America Shouldn't Raise Its Dividend in 2016 originally appeared on Fool.com.
John Maxfield owns shares of Bank of America. The Motley Fool owns shares of and recommends Berkshire Hathaway and 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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