Bank of America Out of the Woods

 | Aug 07, 2014 | 2:00 PM EDT  | Comments
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The major headline this week was that Bank of America (BAC) has essentially reached a settlement worth nearly $17 billion with the U.S. Justice Department relating to the mortgage and derivative issues surrounding its acquisitions of Countrywide Financial and Merrill Lynch. Another $6 billion in settlements is expected due to consumer protection issues, so in the end the number is likely to be $23 billion.

While short-term minds will focus on the settlement number, the real value here is that BofA is finally getting closer to closing the book on this unfortunate chapter in its history. Personally, I think CEO Brian Moynihan has done a marvelous job so far moving BofA forward. As a former lawyer himself, he understands the situation perfectly: there is zero value in going up against the US government in this particular instance.

For what it's worth, I think Bank of America did the U.S. economy as tremendous service by buying Merrill Lynch when it did. If Merrill had been allowed the fail, I think we all know the catastrophe that would have ensued. So as a shareholder of BofA, it's unfortunate that a settlement of that magnitude is being handed down.

But there is zero value in spending precious time and resources on a lawsuit where there is no clear outcome and the cards are stacked against you. Moynihan, thinking like a rational attorney and CEO, realized that. Once this headline number disappears from the mind of Mr. Market, the focus will shift on the bank and its operations.

Little attention today was given to the dividend increase that BofA was approved for. The quarterly dividend quintupled to five cents from one. Sure the new yield still comes out to 1.3% -- unless you bought shares for $6 and now will enjoy a 3.3% yield -- but I believe that over time dividend payments and stock buybacks will continue to increase.

The mortgage toxicity has made BofA a bargain in the finance industry. On a forward-looking earnings basis and price-to-book metric, BofA is valued at deep discounts to the overall industry. The U.S. government clearly has an appetite for settlements and as Bank of America closes the chapter on the past, the market will quickly refocus its attention on the bank and not the lawsuits. Over the next two-three years timeframe, BofA could be one of the best performing financial stocks.

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