Is a Higher Dividend Near for Bank of America?

Bank of America (NYS: BAC) is nearly four years removed from paying a quarterly dividend above a penny a share, but recent developments with the bank may have brought it closer to raising its dividend. At a conference last week, chief financial officer Bruce Thompson indicated that the bank was just waiting for specific guidance from the Federal Reserve before submitting a plan to raise its dividend.

The bank has been close to raising its dividend before, only to be rejected by the Fed. Now, however, the bank's capital ratios seem to be in line with what the Fed was looking for previously, so it might be able to convince regulators to allow it to return money to shareholders. If it manages to do so, it would be great news for investors who have stuck around throughout the bank's more recent problems, and a potential boon for other investors who want to see a larger dividend before jumping in.

What happened to its dividend?
Its last dividend that was greater than a penny was paid out on December 3, 2008 in the midst of the financial crisis. With some financial companies on the brink of collapse after the fall of Lehman Brothers, the Treasury Department and Federal Reserve stepped in with the Troubled Asset Relief Program, or TARP, in an effort to prevent full-scaled collapse. It worked, but all of the banks had to receive money under the program and certain requirements were placed on them, including the amount of money they could pay out in dividends every year.

Some banks passed the Fed "stress tests" earlier this year and were able to raise their dividends or repurchase shares. For example, JPMorgan Chase (NYS: JPM) immediately announced plans to repurchase $15 billion in shares, and Wells Fargo (NYS: WFC) announced an 83% increase to its dividend. Not to be outdone by its much larger brothers, regional banking leader US Bank (NYS: USB) increased its dividend by 56% and announced plans to repurchase 100 million shares of its stock. Meanwhile, Bank of America, despite actually passing the same stress tests, chose not to increase its dividend at the time.

What's changed?
The bank may be in better financial position than it was eight months ago. With most of the toxic Countrywide mortgage debt slowly finding its way off the balance sheet, Bank of America's provisions for credit losses were down an astonishing 48% from last year at the end of its recent quarter. Sure, a $1 billion Justice Department lawsuit makes it seem like the mortgage damage is not over yet, but the bank might actually be turning the corner and moving further away from its Countrywide problems.

Because it is actually starting to look like the worst of the Countrywide problems are behind it, I think the bank is primed for a dividend increase, perhaps in time for the first quarter next year. I think we could see the bank do what US Bank did in March, announcing both a dividend increase and a share repurchase plan. Either way, Bank of America will finally join some of its larger banking brothers in returning real value to shareholders.

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Robert Eberhard has no positions in the stocks mentioned above. Follow him on Twitter for regular articles on the financial sector. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend 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.

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