Retirement Strategy: Why Is Bank Of America In TARP II?

I’ve been getting some feedback as to why I would place Bank of America (NYSE:BAC) in the heart of the new model portfolio. Let me remind you that I have been a BAC bull for a few months now and have been pounding the table about its growth potential. Read this piece for a little background.

As most of you know, I personally own a bunch of shares, model portfolio TARP has plenty of shares, and now it is tucked away with a starting position in TARP II. I am considering adding more shares for myself as well as for TARP II.

Many dividend growth investors will turn their collective noses up at the 2.00% yield as it just would not throw off enough income immediately. Well, the two reasons NOT to have purchased BAC when I started yakking about it were as follows:

  • BAC does not increase its dividend by 60%.
  • Buffett changes his mind and dumps 700 million shares of BAC stock.

Well, both of these risks were eliminated when BAC announced its intention to increase its dividend and Buffett quickly decided to exchange his warrants for 700 million shares. Risk off, right? Now shareholders were going to get a nice pop in the dividend, even with its small yield, and also have Warren Buffett as the largest single shareholder! Nice company to be with I would say and the information was given to all of us well before everything happened! So IF you bought the shares when I first started talking about it, this is where you would be in both growth and income: about 10% capital appreciation and a dividend increase of roughly 60%. Not bad for a few months of waiting right?

Now There Are Even More Reasons To Consider BAC

First, review this article, then let’s take a quick look at the new model TARP II chart as it stands now:

The new model TARP II consists of the following stocks as of today: Altria (MO), PepsiCo (PEP) Hormel (HRL), Lowe’s (LOW), Lockheed Martin (LMT), Williams-Sonoma (WSM), Realty Income (O), Omega Healthcare (OHI), LTC Properties (LTC), Community Healthcare (CHCT), Apple (AAPL), Gilead (GILD), Walgreens Boots Alliance (WBA), Visa (V), Microsoft (MSFT), Novartis (NVS), Bank of America (BAC), AT&T (T), Facebook (FB), NextEra Energy (NEE), Consolidated Edison (ED) Qualcomm (QCOM), and Bed Bath & Beyond (NASDAQ:BBBY)

Since the price of BAC was $ 24.38/share when added to the model, the price as of right now is $ 25.16, so an increase of about 4-5% in value has been added and that 2.10% yield is now down to 1.96%. Not to worry, though; there is more good news to come, AND we have 20+ years to let this stock “bake”. If we avoid another banking crisis, who knows, BAC might become a dividend champ, but in the very least, we can dump it and move the dollars into a dividend aristocrat eventually!

The reasons I am even more optimistic about the share price appreciation are quite simple.

1. A probable Moody’s credit rating upgrade:

The bank’s A1 rating has been put on review for upgrade at Moody’s, with the agency noting improvements to profitability and management’s commitment to a conservative risk profile.

Moody’s also likes Bank of America’s more conservative than peers capital return policy (shareholders may feel differently).

2. The Fed becoming more hawkish than everyone expected, so another rate hike is likely this year, and the Fed’s balance sheet will be trimmed:

Taking a closer look at the economic projections, core PCE inflation is seen at just 1.5% this year, down 20 basis points from the June guess. Inflation is seen at 1.9% next year, down from 2% previously.

The median forecast for the Fed Funds rate at year-end stays at 1.4%, suggesting one more rate hike is in the cards. The median for 2018 is still 2.1%, pointing to roughly three rate hikes next year. 2019 is lowered to 2.7% from 2.9%.

Yields have moved a bit higher since the news hit, with the 10-year yield up 2.75 basis points to 2.276%. TLT -0.3%, TBT +0.6%. The two-year yield has risen to 1.43, its highest since July.

Gold (NYSEARCA:GLD) has lost a few dollars per ounce, now flat on the session at $ 1,311.

The dollar (UUP +0.4%) has strengthened a bit. …

… balance sheet trim starts in Oct. (Sept. 20)

The markets have been sloppy this last week, but BAC moved higher, which is normal when interest rates are set to rise, and lending becomes more profitable. As far as I am concerned, capital appreciation has just begun.

OK, So How About Dividend Growth

This is sort of easy as well. Let’s just look at the basic metrics:

It isn’t that much of a stretch to say BAC will more than likely continue growing the dividend, so getting in when the share price is reasonable will give the yield a kick every time the bank announces a dividend increase. Obviously, I have no idea what the amount of the dividend might be in 20 years, but even if it just doubles to around $ 1.00 annually, at a share price of roughly $ 25, the yield on cost would be a rather sound 4%! Of course, if we wait and the share price rises even more before we add more, then that YOC would be lower. Given the fact that the stars seem to be aligned with the Fed, and the bank is making lots of money, tell me why I shouldn’t add more shares to TARP II, as well as my own personal account!

Look at these fundamentals:

It is VERY undervalued according to S&P Capital, as well as being EXTREMELY financially healthy. I like to get in BEFORE those 2 other metrics move higher, and I like riding the coattails of Warren Buffett!

Growth is headed in the right direction as well as cash flow (great for larger dividend raises) and even book value is up. It sits at $ 27.43/share as of June 30th, so in all likelihood that metric has ticked up a bit Let me be conservative and say it’s now about $ 28/share. That translates into a growth potential of 11-12%, and it will possibly happen sooner than later because of the rising interest rates. Rising interest rates mean rising profits on loans at higher interest rates. That spells EPS, earnings per share, which keeps the upward trend going our way!

The Bottom Line

I might not be the sharpest knife in the drawer, but I think buying more shares of BAC makes sense. I would really like to know the reasons YOU have for NOT owning BAC here. Convince me I am wrong!

Not To Bore You, But…

Knowledge is power, and many folks shy away from the investing world because that very world makes it more confusing each and every day in an effort to sell you something: stock picks, technical strategies, books, videos, subscriptions with “secret ideas,” gadgets, and even snake oil.

My promise to you is that my work here will remain free to all of my followers, with the hope of giving to you some of the things that took years for me to learn myself. That being said, let me reach out to you with my usual ending:

**One final note: The only favor I ask is that you click the “Follow” button so I can grow my Seeking Alpha friendships. That is my personal blessing in doing this and how I can offer my experiences to as many regular folks as possible, who might not otherwise receive it.

Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. The long positions held are based upon what the model portfolio holds and I personally could have held all of the stocks noted at one time or another.

Disclosure: I am/we are long BAC CHCT ED FB GILD GLD HRL LMT LOW LTC MO MSFT NEE NVS O OHI PEP QCOM T TBT TLT UUP V WBA WSM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The portfolio is for educational purposes only, and not an actual portfolio. The long positions are based on the model portfolio.

Tech

This Time It Matters: Why Apple Is Falling

Preface
Apple Inc (NASDAQ:AAPL) is dropping hard after its event to announce the new series of hardware, in particular the new iPhone 8, 8 Plus and X as well as the Apple Watch 3.

It’s Different This Time
Normally when Apple stock dives on lukewarm product reviews we stand firmly in our position that the stock market reaction is over blown. Our simple thesis for that response is to look at demand, which is hypnotically strong, every time. That is not the case this time.

A New Risk is Not Obvious But is Enormous
Apple announced a more complicated lineup of iPhones this time around. It introduced the iPhone 8 series which is an upgrade to the iPhone 7, and then it announced the highly anticipated iPhone X (pronounced iPhone Ten).

Then the company made the iPhone 8 available this month, but pushed delivery of iPhone X to early November, which pre-orders stating in late October. That has created a risk.

It turns out that Apple hyped the iPhone X so much, and poured so much new technology into it, that it has left the demand for iPhone 8 lackluster in Apple terms. Here’s what we mean.

If you go to the Apple Store, and try to purchase an iPhone 8, the wait time is essentially 1-3 days for the smaller memory version. Here is an image:

That is for the iPhone 8, in Los Angeles, on Verizon’s (NYSE:VZ) network. The other networks are essentially the same. A normal wait time for a new iPhone release is usually several weeks, let’s say 2-4 depending on where you are in the world.

There are also reports that in store lines are much smaller than before, with one report pinpointing Sydney Australia, where only 30 people were camped out for the new release. Reports from China are similar.

Here are links to two stories:

Turnout for iPhone 8 Launch in Australia “Bleak” as Customers Hold Out for Upcoming iPhone X
The iPhone 8 launch in Sydney saw “a bleak turnout,” reports Reuters, with fewer than 30 people lining up outside of the Sydney Apple Store on George Street. In past years, hundreds of people have lined up for new iPhones on release day.

Apple Falls After Analyst Report Indicates Weak iPhone 8 Demand
Consumers pre-ordered about 1.5 million handsets on Chinese retail website JD.com in the first three days, compared with about 3.5 million for the comparable period of iPhone 7 orders.

Tim Cook just said he “couldn’t be happier” with the iPhone release (and Apple Watch 3). While sales are lower than prior models, there is one reason, a big reason, that he may actually be telling the truth.

Is There a Plan?
One of the headlines that surfaced from the Apple Event was that the iPhone X was very expensive, starting at $ 999 and climbing to $ 1,200 based on the configuration.

It’s possible, maybe even likely, that Apple decided to release the iPhone 8 for less to make it appear that it was not forcing Apple loyalists to buy a far more expensive phone by offering a reduced priced new model (iPhone 8).

In fact, it does appear that even in the bearish analyst notes, each tends to comment on the fact that demand reduction for the iPhone 8 is simply a reflection of the outsized demand for the iPhone X.

If that’s true, then Apple will have an average selling price significantly higher than in prior times, and if demand is in fact to the point where Apple also sells more units, then that would bring a windfall of profits larger than any company has ever seen in one quarter. If that sound overly bullish, it’s just the choice of words — Apple already has the largest earnings ever in one quarter, so this would be a breaking of its own record — also known more simply as, “growth.”

Back to Risk
While there is a rather bullish narrative to wrap around this odd iPhone selection, there is also, in earnest this time, a reasonable bearish thesis.

Apple won’t be delivering its iPhone X until well into November, and if demand is very strong, it might not even be able to deliver before the holiday season in the United States. And while, certainly, if all of those sales simply occur later in the year (or early 2018), then that’s fine, but to consider that a foregone conclusion is a step we are not willing to take with blind faith.

Some consumers, perhaps many consumers, will not wait. And while Apple loyalists may stick around for a later date, the all-important “Android switchers” (those smartphone Android owners that switch to Apple) may not — and that is a real risk and worthy of a stock drop, until proven otherwise.

Apple’s market share in the United States is jumping as Android loses market share — an under reported but critical phenomenon. On January 11th, 2017, 9TO5Mac wrote iPhone market share grows 6.4% in USA, takes share from Android in most markets.

Apple gained 9.1% in the UK, mostly at the expense of Windows phones.

The iPhone grew its market share in Australia, France, Italy, Japan, Spain, the UK and USA, with Android seeing its own share drop in all of these countries bar Italy, where its growth was less than half that of iOS.

Those are Android switchers and Apple may have just put that group, or at least that trend, in serious jeopardy.

Now What?
We believe the iPhone X is going to be a knock-down drag-out mega hit, and the elevated price will make it yet an even larger success. But, the risk that Apple took, as of right now, is hurting the company both with iPhone 8 sales, and potentially, with Android switchers. And that is not a false narrative — it is accurate.

That risk means the stock should drop, and is dropping.

But, we’re not done yet. What we did not show you, and is easily missed unless you are really looking, is how hard Apple is focusing consumers on the iPhone X over the iPhone 8 — in our opinion.

I recorded a 45 second video arriving on the Apple Store and looking at iPhones. I have turned to video to allow you to make your own decision, as opposed to snapshots, which are too selective and an be used to weave any narrative the author likes.

When you watch this video (below), decide for yourself if you feel that Apple is purposefully pointing people to the iPhone X over the iPhone 8. Here we go:

That’s hardly headline grabbing footage, but we found it noteworthy.

Apple Watch 3
There have been some pretty poor reviews of the Apple Watch 3 surrounding its LTE connectivity and its battery life. This is one of those times where the reviews are meaningless. Demand is strong and that’s all that matters.

Here is a snapshot from the Apple Store for that product:

We see the Watch becoming a runaway success as people learn to use that wearable device as a standalone product — leaving the phone at home on runs, meetings, swims, hikes, and whatever other times such a convenience could be desired.

Conclusion
We maintain our Top Pick status on Apple, but have certainly tempered our bullishness with an undeniable new risk. It might work out very well, but, it might not, and that is a new risk to Apple stock.

The author is long shares of Apple Inc (NASDAQ:AAPL).

Thanks for reading, friends.

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Disclosure: I am/we are long AAPL.

Tech