Bank of America Is Back in Business: Raising Dividend and Paying Up

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Bank of America

Bank of America (NYSE:BAC) shareholders were given a solid indication that the institution’s financial position has appreciably solidified on Thursday: The lender will be increasing its dividend for the first time in years.

In 2009, in the face of the ravaging effects the financial crisis had on the bank, the bank’s quarterly dividend was lowered to just a penny in order to preserve capital. Chief Executive Officer Brian Moynihan then told investors in March 2011 that the bank would restore a portion of its payout, declaring at what was described as the Wall Street equivalent of a coming-out party that a “new era” for the company had begun. But the Federal Reserve was not on board.

However, in the years that separate Bank of America from its troubled past, its stock has risen more than 100 percent to its Wednesday closing price of $17.18 per share; the Fed has deemed the bank strong enough to withstand prolonged market stress in recent tests; Moynihan has dealt with a bulk of the legal issues on the bank’s docket; and, recent earnings have shown the CEO’s efforts over the past five years to shore up capital, handle the bank’s mortgage problems, and lay off employees has provided a foundation for rebuilding Bank of America’s banking business. Last year was the lender’s most profitable year since 2007.

As Bank of America’s prospects have improved, investors have pressured management to boost the bank’s dividend. And finally, the central bank has given Moynihan the necessary approval to increase the bank’s payout to its shareholders. Earning that authorization from the Fed is a watershed event in Bank of America’s post-financial-crisis life. Results of the annual stress tests — in which, over the course of nine quarters, banks would face an unemployment rate rising to 11.25 percent, a 50 percent drop in stock-market values, and a 25 percent fall in residential property values — showed last week that Bank of America had sufficient capital to survive an economic downturn on par with the worst of the financial crisis. This performance prompted the Fed to approve the bank’s capital redistribution plan, and on Wednesday, Moynihan announced that Bank of America’s dividend would be increased to 5 cents per share. Bank of America’s board also approved a $4 billion stock repurchase program.

The 5-cent dividend, only a fraction of its 2008 peak of 64 cents per share, will begin in the second quarter.

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