Should You Buy This Mega-Bank?

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Many bank stocks have rallied considerably over the past year. It’s not entirely difficult to see why: a slew of economic data reports in recent months have confirmed that the U.S. economy is on the mend. Slowly but surely, the nation digs itself out of the massive hole caused by the financial crisis.

Consumers are feeling better about their personal finances, the housing market is showing signs of life, and the labor market continues its gradual, albeit painfully slow, recovery. Banks are major beneficiaries of all these tailwinds, and bank stocks are in full rally mode.

One of the biggest banks in the United States is Bank of America (NYSE: BAC), which like the country itself, is slowly getting itself back on solid footing. Is now the time to buy?

Rising from the ashes

As the financial crisis set in, investors watched in horror as many of our nation’s banks, including Bank of America, JPMorgan (NYSE: JPM), and Wells Fargo (NYSE: WFC), teetered on the brink of insolvency. Stock prices at these banks plummeted, and their dividends were slashed to nearly zero.

Fast forward to today, and you’d think the financial crisis never happened. Banks are back to reporting profitability, and some have raised their dividends many times.

Wells Fargo had a great first quarter, achieving record net income in what was a solid report. Revenue was roughly flat year over year, but diluted earnings per share rose 23% and the company expanded its return on average assets and return on equity ratios by 18 basis points and 145 basis points, respectively.

JPMorgan’s first quarter was equally impressive. Net income and earnings per share clocked in at record levels of $6.5 billion and $1.59 per share, respectively. This represented 33% growth in both metrics versus the first quarter last year.

Bank of America’s continued struggles

Bank of America, meanwhile, continues to be haunted by the memories of the financial crisis, namely in the form of massive legal expenses.

Bank of America has paid more than $50 billion in mortgage-related legal fees to settle disputes made against its subsidiary Countrywide, which it acquired just before the financial crisis.

The bank reported first-quarter profit of $0.20 per share, missing analyst expectations. In the first quarter, the bank had litigation expenses of $881 million.

These expenses have hurt profitability and impeded the company’s ability to reward shareholders. The bank hasn’t been able to increase its dividend above its current level of $0.01 per share quarterly.

This token payout pales in comparison to what other banks offer their shareholders.

Impressively, Wells Fargo has raised its dividend in two consecutive quarters. The company yields 3%, and its annual dividend payment is up 36% from its payout level one year ago.

Likewise, JPMorgan is back to paying shareholders a healthy dividend, which yields nearly 3% at recent prices.

Better opportunities among the banks

Bank of America is slowly healing its business and returning to profitability. However, massive legal expenses continue to be a major drag on growth, which is reverberating through to shareholders in the form of puny dividends.

Wells Fargo and JPMorgan, meanwhile, are posting record operating results and in turn, ratcheting up their shareholder rewards.

As a result, while Bank of America may prove to be a long-term winner, there are better opportunities to be had today among bank stocks. Therefore, I’d recommend investors give Wells Fargo and JPMorgan preference.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.


Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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