Why Bank of America Is a Buy Now

Following the recent round of stress tests, bank stocks rallied, and the stock markets saw an upswing. All told, the Dow Jones Industrial Average (INDEX: ^DJI) is up nearly 5% this year.

Bank of America (NYS: BAC) has been the Dow's top performer, up 59% for the year. With the next round of bank earnings just around the corner, now's a good time to take a closer look at the stock.

Creating a new bank
Bank of America's efforts to clean up its balance sheet and improve its profitability is impressive. CEO Brian T. Moynihan's plans to implement these steps, dubbed "Project New BAC," started in the second half of last year. The two-phase project is designed to restructure and simplify the company's businesses in a bid to increase profits and grow revenue.

Phase 1 of the project is centered on the bank's consumer businesses, which include deposits, cards, and commercial real estate. It's already under way, and its major goal is to eliminate 30,000 positions. During this phase, B of A hopes to realize $5 billion in cost savings by 2014, with 20% of these savings expected to be achieved this year.

Phase 2 revolves around B of A's Global Commercial Banking business.

New BAC should be in place by 2014. The plan is definitely a positive step for the company as Moynihan looks to streamline the bank's business.

Putting the brakes on foreclosures?
I believe B of A's latest pilot program is another positive step: Homeowners in trouble with their mortgages can submit the deeds of their homes to the bank, and instead of vacating, they can sign leases allowing them to rent their houses back. The "Mortgage to Lease" program is still in its infancy, and B of A will eventually offer leases to around 1,000 homeowners. This program may change the way other banks handle distressed homeowners.

If the program goes ahead in earnest, it could provide a constant source of revenue and save costs, as well as avoid the hassle of going through foreclosures. Although the conflicts of interest in the mortgage servicing industry may be difficult to overcome, changing the status of a property from foreclosed to an income-generating property would be a good thing to see.

No dividends? Big deal!
The ailing bank has tried to boost its capital base for a while now, and its efforts may be bearing fruit. B of A received positive news from the Federal Reserve recently, as it confirmed that the company had made significant progress when it came to bolstering its capital. After clearing the recent round of stress tests, the bank chose to strengthen its capital base further instead of raising dividends or repurchase its shares -- which the Fed probably wouldn't have allowed it to do anyway.

Following the recent round of stress tests, some banks boosted their dividends as well as implemented stock repurchases to pay as much back as possible to shareholders. Biggie JPMorgan Chase (NYS: JPM) raised its quarterly dividend by 20% and also announced a staggering $15 billion buyback program. On the other hand, the Fed quashed fellow big bank Citigroup's (NYS: C) plans of increasing its payout, as it failed to clear the tests.

Although B of A isn't paying out higher dividends yet, it will look to do so sooner or later. Currently, it's paying out a nominal $0.04, with a yield of 0.4%. As Moynihan looks to eventually transform the bank, investors have a lot to look forward to -- including higher dividends. I believe this turnaround story is a stock to watch out for in the long run. To keep tabs on Bank of America, simply add it to your stock Watchlist.

Not sold on B of A? Don't worry -- we have a bank for you with some of the best operational numbers anyone's seen yet. The Motley Fool features it in its brand-new free report "The Stocks Only the Smartest Investors Are Buying." We invite you to download a free copy to find out the name of the bank Warren Buffett would probably have been interested in, in his earlier years.

At the time thisarticle was published Fool contributor Shubh Datta doesn't own shares in the companies mentioned above.The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Citigroup. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.