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

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.

“Over the last few years we have focused on positioning the company to return capital to our shareholders,” Moynihan said in a Wednesday press release. “We know that increasing the common dividend is important to our shareholders and we are pleased that we can continue to return excess capital through both repurchases and dividends.” Wednesday’s announcement compares favorably with 2011, when Bank of America was left behind as the Fed authorized dividend increases for its rivals, including JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC). In 2012, Bank of America did not request an increase to its investor payout, and last year a $5 billion share repurchase program was approved.

The dividend news was met with enthusiasm from investors. “Shareholders have had a pretty significant wait for a change in their performance,” Jonathan Finger, whose Finger Interests investment firm owns 900,000 Bank of America shares, told Bloomberg. “The financial crisis and its impact on Bank of America in particular were probably deeper than most investors expected.” That the Federal Reserve approved of the capital redistribution plan is evidence of how far the bank has come from the financial crisis that almost sunk the institution. During the worst of the crisis, then-CEO Kenneth Lewis told analysts in October 2008 that “it’s a damn disaster,” when asked about lending conditions.

Another sign that Moynihan-led Bank of America has taken great strides from the bank it was once was the announcement that a pair of settlements had been reached for accusations related to financial-crisis-era misdeeds. The institution will pay $6.3 billion in cash to Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) to resolve lawsuits claiming it misrepresented mortgage loans packaged into $57.5 billion worth of securities that were bought by the government-owned financiers. Bank of America also announced Thursday that it will buy back approximately $3.2 billion of mortgage bonds from both firms. The Federal Housing Finance Agency lawsuits represented one of the largest legal disputes still on the lender’s docket.

More than five years have passed since the housing market bubble burst — causing a credit crisis and leaving financial institutions stuck with securities that had lost much of their value — and the federal government is concluding its attempts to assign responsibility for the problems that drove the mortgage boom and the subsequent collapse of the housing market. Thanks to its 2008 acquisition of Countrywide Financial, Bank of America has been drawn into federal court for years regarding its mortgage business, and Countrywide Financial has cost Bank of America more than $50 billion in settlements over the subprime lender’s allegedly fraudulent mortgages, and those costs proved to be quite troublesome for the bank’s balance sheet.

Bank of America shares traded up slightly from their opening price of $17.28 early Thursday morning.

More From Wall St. Cheat Sheet:

Follow Meghan on Twitter @MFoley_WSCS