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A decade ago, big banks like Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) were on the verge of facing challenges that would threaten their very existence. Now, they've both recovered sharply, finding ways to survive the financial crisis and restore their businesses to reflect the better times for the U.S. economy.
Yet along the way, other issues have come up that have ramifications for these banking giants. After a big run-up for the banking sector, smart investors want to know whether these stocks have further to go or could be vulnerable to a pullback. Let's look more closely at Bank of America and Wells Fargo to see how they stack up on key metrics, so that you can decide which is the better buy right now.
Image source: Bank of America.
Stock performance and valuation
Bank of America and Wells Fargo have similar businesses, but their stocks have produced very different returns for investors. B of A is up 34% since February 2017, but Wells Fargo is essentially flat, having risen just 1% over the same period.
Looking at basic valuation measures produces some interesting conclusions. When you look back at what the two banks have earned over the past year, Bank of America looks like the more expensive stock, trading at 20 times trailing earnings compared to an earnings multiple of just 14 for Wells Fargo. However, when you incorporate expectations for future earnings performance, the two stocks converge, with both sporting a forward earnings multiple of between 10 and 11.
The two stocks have also seen their valuations relative to book value come closer together. For years following the crisis, B of A traded at a discount to book value. Now, the bank giant has a price-to-book ratio of about 1.3, compared to Wells Fargo's 1.55. The two stocks are close on valuation, but performance clearly pushes the needle toward Bank of America.
Dividends
Prior to the financial crisis, bank stocks were among the top dividend payers in the market. At this point, Wells Fargo pays a yield of about 2.7%, which is attractive compared to B of A's 1.5% dividend yield.
Wells Fargo was able to get its dividends back up toward pre-crisis levels much more quickly than Bank of America has managed. By 2014, Wells had started paying more in dividends than it had in 2008, and subsequent growth has pushed the payout even further upward. By contrast, Bank of America didn't make any dividend increases until 2014, and it's been playing catch-up ever since. Now, the question is whether Bank of America will be able to keep boosting its payout even as Wells Fargo's dividend growth has slowed considerably over the past few years.