The financial crisis is almost a forgotten period for U.S. banks. After nearly a decade of recovery, too-big-to-fail financial institutions Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS) have not only survived but thrived in the post-crisis bull market by finding new ways to grow. Even though the much hoped-for deregulation from a Republican administration has been slow in making itself felt, investors are nevertheless optimistic that both B of A and Goldman will eventually benefit from looser restrictions on how they do business.
Those who've invested in Bank of America and Goldman Sachs have already earned impressive returns. Yet they still want to know which of the two banking giants is better positioned for the future. Let's look more closely at B of A and Goldman to see which one looks like the smarter pick right now.
Image source: Getty Images.
Stock performance and valuation
Financial stocks have generally done well over the past year, but Bank of America is the clear winner in the recent past. Since December 2016, B of A has jumped more than 30%, compared to just a 6% rise for Goldman over the same period.
You might think that given their disparate performance, Bank of America's valuation would have grown well above that of its peer. Using simple earnings-based measurements that look at recent financial statements over the past 12 months, B of A does have a higher trailing earnings multiple of 17, compared to just 13 for Goldman Sachs. The gap narrows considerably, though, when you look at valuations based on near-term future expected earnings. Goldman's forward multiple comes in at just over 12, but Bank of America drops to just above 13.
Another common measurement of bank valuations involves book value, and here, the edge goes the other way. B of A trades at about 1.24 times book value, compared to 1.29 times book for Goldman. All in all, Bank of America has better momentum for investors, and valuations are relatively similar.
Dividends
One area in which bank stocks haven't returned to their former glory is in the dividends that they pay. Before the financial crisis, many financial institutions were among the top dividend payers by yield in the market. Now, it's rare to find high-yield bank stocks, especially among the larger, better-known institutions in the industry. Bank of America currently yields 1.6%, while Goldman Sachs weighs in at 1.15%.
Bank of America has made a more recent push to boost its dividend than Goldman. Goldman's last increase was a $0.10-per-share boost to $0.75 per share quarterly, made earlier this year. Bank of America paid only a token $0.01 per share every quarter until 2014, when the Federal Reserve finally granted permission for the bank to boost its dividend to $0.05 per share. Subsequent increases of 50% and 60% over two successive years brought the payout to its current level.