Due Diligence Earnings

Bank of America Q3 Earnings: Strong Consumers = Strong Bank

I wrote this on October 17th for a CommonStock post and totally spaced putting it up on the website! So here it is one week late, my apologies!

Bank of America $BAC released their Q3 earnings report pre-market this morning, October 17th. The report surprised (in more ways than one) and sent the stock up 5.62% at the most in pre-market and closed 7.07% after-hours this evening.

I read the earnings transcript and reviewed the earnings presentation and can tell you that a key set of highlights shows that there is great operating performance behind this move higher and hint to a couple tailwinds that make the bank and the economy look good despite looming inflation and recession concerns. Read the transcript and presentation for yourself here, all of the presented information comes from that.

Those key items include:

  • Net Interest Income & Improved Outlook
  • Excess of Leverage and LTAC Ratios
  • Strong Consumer Spending & Growing Deposits

Net Interest Income

Net interest income (the primary measure for how profitable a bank is) increased $2.7 billion or 24% year-over-year. This is driven primarily by benefits from higher interest rates and loan growth. NII is up $1.3 billion over the last quarter. Thanks to rapid rate hikes by the Fed, short-term interest rates have risen over 200 basis points in the last year. This drives up the interest that $BAC earns on their assets with adjusting rates, when that is coupled with disciplined deposit pricing this drove nearly $1 billion in NII growth this quarter.

$BAC provided forward guidance on their NII as they did last quarter. Previously, investors were told to expect consecutive NII increases of $1 billion in both Q3 and Q4. Q3 just put up $1.3 billion. With this outperformance and the expectation that rates will continue to increase, loan volume will keep growing, and deposit prices are baked in, $BAC updated their Q4 expectation to $1.25 billion. That would put Q3 and Q4 total NII to $2.55 billion compared to the prior $2 billion.

Excess of Leverage and LTAC Ratios

Regulatory capital can sometimes be a negative throttle on the growth of banks and is something I like to keep an eye. I’d like to highlight $BAC’s supplemental leverage ratio (SLR). Introduced in 2010 as part of the Basel III requirements, a SLR applies to banks with $250 billion or more in total consolidated assets. It requires that they hold a minimum ratio of 3%. Enhanced supplementary leverage ratios apply larger and more systemic financial institutions and require a larger ratio. This ratio calculates how much capital a bank must hold relative to their total leverage exposure

In regard to $BAC’s regulatory capital, their supplemental leverage ratio increased to 5.8% versus the minimum requirement of 5%. This leaves some very positive room for balance sheet growth. The bank’s TLAC ratio (total loss absorbing capacity a standard to minimize the risk of a bailout) is well above the requirement which can support balance sheet growth as well.

Strong Consumer Spending & Growing Deposits

This last section is the most important! $BAC’s earnings show some great stats about the overall health of their consumer base.

First, consumer spending is strongly up 12% year-to-date. One could say this is on account of inflation. To counter, I would direct your attention to the top right graph below, not only is payment dollars up 10%, but the number of transactions is up 6% as well. That increase in sales volume is a positive sign that inflation is not slowing purchasing.

Second, consumer deposit levels (bottom right graph) are multiples above pre-pandemic levels. These levels are higher compared to a year ago as well. These deposit levels suggest continued spending capacity, even with inflation. $BAC opened 400,000 new consumer checking accounts for the 15th consecutive quarter of growth which is helping push deposit levels consistently higher.

Third, total credit and debit and usage are 12% above pre-pandemic levels. The payments on those credit cards are 1,000 basis points higher than pre-pandemic. More purchasing activity in a higher rate environment is the perfect position for a bank to be in. Add to that the fact that credit days past dues are significantly trending downward and we get a picture of a very strong consumer at the moment.


In sum, consumer activity is stellar. I didn’t review the wealth and investment leg of the bank in this post, but those branches showed great activity as well. NII has improved quickly and appears to be able to continue that trend. The average consumer is healthy and strong. $BAC’s balance sheet has room for growth and responsible income statement management looks to show that margins will continue to grow as well.

In addition to all of that, $BAC increased their dividend last month by 4.8%. They also bought back $450 million in share repurchases that covered employee issuances so as to not dilute.

Earnings Economics Market Recap

Stock Market Week in Review – 7/22/2022

Concerns of slowing growth were constant this week, but surprising the stock market showed similar resiliency! In fact, the markets traded through growth worries to show a winning week before Snap decided to ruin the party with their Q2 earnings report and sour view of the conditions for online advertisements.

Before Snap’s report after Thursday’s close, the Nasdaq was up 5.2% and the S&P was up 3.5% for the week. They ended up closing the week with 3.3% and 2.5% gains respectively. These major indexes reclaimed a position above their 50-day moving average.

Overall, despite the small setback on Friday, the stock market had a good week. However, economic data releases weren’t as positive. To name a few statistics for you: The July NAHB Housing Market Index had its biggest drop since April 2020, June housing starts and home sales showed some weakness, initial jobless claims hit 250,000 for the first time since November of 2021, the July Philadelphia Fed Index fell to -12.3, the June Leading Economic Index had its fourth consecutive decline, and both the HIS Market Manufacturing PMI and Services PMI slipped lower.

On top of the economic data, big players in tech including Google, Microsoft, Apple, and Snap have indicated that they plan to slow their number of new hires.

The Treasury market showed more of this pain than the stock market did, with a number of notes falling more than 10 basis points for the week. The market reacted to bad economic readings and disappointing earnings reports throughout the week as if it was not a surprise. In all honesty, it isn’t a surprise. The first half of this year was largely predicated on a belief that the market would be dealing with bad economics and earnings for some time, and that’s proven to be true.

With clear signs of slower growth and falling interest rates, it was the growth stocks that took the lead in the drive higher this week. The Russell 3000 Growth Index was up 3.2% versus a 2.4% gain on their value index. The Philadelphia Semiconductor Index surged 5.5% off the shoulder of the $52 billion chip bill that should pass the Senate this next week.

Next week, potentially impactful items on the economic calendar include the next Fed meeting on Wednesday, a GDP and Manufacturing reading on Thursday. We also have a packed earnings calendar.

Last week did much better than I had anticipated. However, I’m sticking with my bear case again for the next week. The Fed will announce another rate hike, which has room to surprise, and earnings next week is very tech heavy, which could drag down the indexes if they disappoint.

Regardless of the way things move, we will buy structurally sound companies that pay safe dividends and have a promising future. We did this last week with some buys in INTC and ALLY to name a few. Read the portfolio update here.


Dividend Dollars

Earnings Economics

Stock Market Week in Review – 7/15/2022

It was another volatile week in the market this week that started with 3 days of selling and ended with a huge rebound, however the S&P 500 still ended down -0.9% with the NASDAQ faring worse down -1.6% and the DOW doing the best with -0.2%.

It felt like the market had started the week scared on Monday and Tuesday as we waited for the latest CPI reading to come out on Wednesday. In addition to that, Spain’s Prime Minister stated that Spain is likely to have lower than expected growth in the near future, which sparked some global growth concerns in the market early in the week. Shell CEO also warned that Europe is going to have an energy crunch in this coming winter and may need to ration energy. There were also reports of Chinese citizens boycotting their mortgage payments. The world’s economic health is beginning to show signs of tears.

When Wednesday came, the June CPI report was released which had shown a 1.3% month-over-month increase that lifted the year-over-year growth rate to 9.1%, pretty far off from the 0.3% decrease that was expected. A level that hasn’t been seen for 41 years. Thursday then followed with the release of the PPI report which showed a similar trend. It increased 1.1% MoM which put the YoY rate to 11.3%.

This week also kicked off earnings season with a couple of disappointing reports from major banks Morgan Stanley and JPMorgan Chase.

After all this, stocks finished this down week on a happy note powered by the University of Michigan Consumer Sentiment Survey which showed an increase in sentiment, in line with foreceats, due to improving inflation expectations as a result of the recent drop in energy prices. On Thursday, WTI crude fell to new low level not seen since February but bounced back 8.2% higher to finish Friday. If energy continues to push higher through this rebound, the positive push in sentiment we saw could easily be reversed.

Next week, potentially impactful items on the economic calendar include the UKs CPI reading which is forecasted to increase 0.2%, Japan’s interest rate decision will be extremely impactful if the stalwart wavers and moves up rates, US good orders, and the next FOMC meeting where rates are expected to move up 0.75%. We also have a handful of earnings from mega caps like Apple, Microsoft, Google, Amazon, Tesla, and a handful of oil companies that may affect the market.

In my opinion, it looks like the market is getting ready for a move down next week given the risky economic events and important earnings call which are more likely to disappoint than excite.

However, regardless of if the market is up or down, my approach to investing stays the same. We buy strong dividend payers with healthy balance sheets and solid businesses. We did that this week with some strategic buys in $BAC and $MMM, read the portfolio update here. Keep your eyes open for good opportunities to add to those kinds of companies and stay patient. Thank you for reading!


Dividend Dollars

Dividend Stocks Dividends Due Diligence Earnings

Comcast (CMCSA) – Q1 2022 Earnings Beat But Muddled Broadband Growth Leaves Investors Wanting

Comcast (CMCSA) reported earnings before the bell on 4/28/2022. The company performed fairly well, however the stock dipped more than 5% after the earnings call.

Here are the key points:

• EPS: 86 cents per share adjusted vs. 80 cents per share unadjusted, average analyst estimate was 81 cents.

• Revenue: $31 billion versus estimates of $30.5 billion

• High Speed Broadband Customers: 262,000 vs. 229,000 new customers. However, 80,000 of the 262,000 were free subscribers from COVID relief connection programs.

Now let’s go into more detail about the call.

On the earnings call Brian Roberts, CEO and Chairman, provided a statement that provides high level insight into the company’s performance for the quarter: “2022 is off to a great start. Each of our businesses posted healthy growth in adjusted EBITDA, contributing to a double-digit increase in adjusted EPS as well as significant free cash flow generation in the quarter. And we achieved all of this while continuing to invest in our businesses for the long term, while also increasing our return of capital to shareholders.”

As you can see in the image above, revenue is up 14%, adjusted EBITDA increases 8.8%, and adjusted EPS increases 13.2%. Through the quarter, Comcast returned $4.2 billion to shareholders through $1.2 billion in dividend payments and $3 billion in share repurchases.

The NBCUniversal segment (see above), which includes their media, studios, and theme parks, had posted total revenue of $10.3 billion and an adjusted EBITDA of $1.6 billion, 46.6% and 7.4% respective increases on the first quarter of 2021.

Roughly 21% of media revenue was broken out as incremental revenue from the 2022 Beijing Olympics and the NFL’s Superbowl. The organic 6.9% increase in media revenue was attributed to higher advertising and distribution revenue.

Comcast’s streaming service Peacock is showing good growth. Their platform added 4 million paid subscribers, bringing the total to 13 million. Total active monthly users rose to 28 million from 24.5 million previously. With 13 million paid subscribers and 15 million active free users, Peacock is uniquely positioned in the market. Their platform is a natural extension of their existing video business with 2 revenues streams (subscribers and paid advertising to free users). Peacock has seen a 25% increase in hours of engagement year over year which shows that the increase in users, which is partly driven by events like the Olympics and the Superbowl, is being retained.

More modest growth for Peacock is to be expected as events slow down in the next two quarters. Once sporting events in the fourth quarter kick off (Sunday night football, premier league, and the world cup), Peacock activity should show more momentum. Studio revenues should increase as well with titles like Minions, Jurassic World Dominion, and the Vampire Academy series kicking off.

The cable communications segment (see above) showed modest growth, with revenues gowning 4.7% to $16.5 billion and adjusted EBITDA growing 6.5% to $7.2 billion.

This growth was driven by increases in broadband, business services, wireless, and advertising revenues. For the quarter, total broadband customers increased by 262,000 which beat the 229,000 average analyst estimate.

However, about 80,000 of those subscribers were free Internet Essential customers. Without those subscribers being included, the actual number of paying customers added to the business is actually around 180,000 which falls far short of the analyst estimate.

On the call, when asked about this, Michael Cavanagh CFO stated that this transitional impact in the net subs added is a result of the ending of the COVID programs where used could come into the service for free. During COVID, they were conservative with how they counted these free subs, however, after ending the program in the end of 2021 only about a third of those customers transitioned to being paying customers. Michael Cavanagh said that there won’t be any ongoing roll forward into the second quarter, therefore he doesn’t think Comcast will experience any negative impact going forward as a result of ending the program. It is essentially cleaning itself out this quarter.

With the performance beating most estimates by a modest amount and the muddled growth of broadband subscribers working itself out through the termination of the COVID relief connection program, I think the dip in stock price is unreasonable. If the second quarter earnings report shows that the free users have been cleaned up and broadband growth continues to trend in the right direction, this dip will have been an overreaction by the market and a great time to add to this dividend paying position at a current yield of 2.6%.