Hurry Up and Wait for the Breakout in Bank of America Stock
Bank of America (NYSE:BAC) could finally break out. The BAC stock price of around $33 per share represents a post-financial crisis high. Still, for the last month, Bank of America stock has paused, trading in a narrow range.
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The lack of meaningful movement leaves BAC’s short-term future uncertain. However, the equity has become positioned for a breakout with a low valuation and a sizable, growing dividend, the short-term stagnation in Bank of America should soon give way to a brighter, long-term future.
The Buffett Effect
Back in September, I warned investors to stay on the sidelines with Bank of America stock while it traded in a range. The current economic environment had become a mixed bag for BAC stock. Although avoiding a recession helps the bank, lower interest rates cut into their profits. Moreover, every time it began to move significantly above $30 per share, it would pull back.
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However, things have changed since then. The fears over the inverted yield curve in August have dissipated. The prospects for a trade agreement have improved.
Also, we can feel more confident than ever that Bank of America stock has a fan in Warren Buffett. At 947,760,000 shares, it has become Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) second-largest holding, lagging only Apple (NASDAQ:AAPL). Moreover, the value, now at over $31.5 billion, exceeds that of his one-time favorite bank stock, Wells Fargo (NYSE:WFC), by over $11 billion.
In October, he sought permission from the Federal Reserve to take his stake above 10%. This and a positive earnings report sent Bank of America stock surging from just above $27.50 per share to the BAC stock price of $33-plus per share where it trades today.
I would treat any news about Warren Buffett with a grain of salt. Filing permission to buy more does not mean he will buy immediately. Moreover, when we finally hear that he has acquired more Bank of America stock, between three and six months will have passed since he made the purchase. Still, I would treat this news as a good sign for long-term positions in BAC.
Consider BAC a Long-Term Buy
Furthermore, the good news about closing above $33 per share is that the long-time price ceilings hampering Bank of America stock have broken. Now, one psychological barrier has gone away as it reaches highs not seen since the financial crisis.
This leaves us with a BAC stock that trades at a forward price-earnings (PE) ratio of around 11.2. This year’s expected earnings growth rate of 3.8% looks sluggish. However, with profit growth expected to reach 9.6% in fiscal 2020, one can see why Warren Buffett wants more BAC.
Still, despite this optimism, it may take time to see any gains. Bank of America stock has stuck close to the $33 per share level for about a month now. Also, given the fact that it surged to that level on good news, bad news such as a delay in the trade agreement could send it falling again.
However, even if that happens, I do not see a significant drop coming. Moreover, the most recent quarterly dividend announced came in at 18 cents per share. This represents an increase from 15 cents per share in the previous quarter. It also marks the fifth year of annual payout hikes for Bank of America stock.
Furthermore, the 2.2% yield already exceeds S&P 500 averages, and I see nothing that would stand in the way of annual dividend increases for years to come. With the potential for gains in both growth and income, I think investors should keep their eyes peeled for buying opportunities.
Concluding Thoughts on Bank of America stock
Bank of America stock appears headed for a bright, long-term future. The fact that Warren Buffett has taken an interest will help investors warm to the stock quickly. However, from a trading standpoint, it has managed to break a long-held price ceiling while still trading at a multiple that should attract both growth and income investors.
Not all signs indicate it will move higher immediately. The narrow trading range over the last month points to short-term uncertainty. Moreover, investors cannot reliably predict the direction of trade talks or the economy.
However, with BofA on a sustained path to growth, and with Bank of America stock offering a reasonable valuation and a significant, growing payout, investors should continue to bid BAC stock higher over the long haul.
As of this writing, Will Healy is long BRK.B stock. You can follow Will on Twitter at @HealyWriting.
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