It’s been almost five years since Lehman Brothers, then the nation’s fourth biggest investment bank, filed for bankruptcy. Most investors know all too well what happened next: a financial crisis unlike any other since the Great Depression that brought the global financial system to its knees.
Since then, the U.S. economy and financial system have steadily healed. Many of the nation’s financial institutions are lending again and reporting profits, and bank stocks have risen in tandem.
Unfortunately, not all is well for America’s largest financial institutions. Ongoing legal troubles stemming from activities leading up to the financial crisis continue to drag on Bank of America Corp (NYSE:BAC). Because of this, should investors avoid the bank altogether?
One bad apple spoiling the bunch
Bank of America just can’t get its act together, as it continues to be haunted by the financial crisis.
Things got even worse for Bank of America Corp (NYSE:BAC) when, on Aug. 6, the U.S. government filed two civil lawsuits against the banking giant, for what regulators claim was fraudulent activity involving $850 million in mortgage-backed securities.
This is just the latest lawsuit in what has been a recurring pattern for Bank of America. Huge legal bills seem to drag down Bank of America’s profits every quarter.
Bank of America Corp (NYSE:BAC) has paid more than $50 billion in mortgage-related legal fees to settle disputes made against its subsidiary Countrywide, which it acquired just before the financial crisis.
Moreover, the bank’s first quarter results were adversely impacted by legal troubles. Bank of America reported profit of $0.20 per share, missing analyst expectations. In the first quarter, the bank had litigation expenses of $881 million.
Fortunately, not all banks are flailing under the weight of steep legal bills. JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) aren’t just surviving the post-Lehman environment, they’re thriving. Recent quarterly results from each bank bear this out.
J.P. Morgan reported 14% higher revenue and stellar 32% growth in earnings per share in the most recent quarter. Wells Fargo, meanwhile, generated record quarterly earnings per share of $0.98, up 20% from the previous year.
Even better, both banks are feeling so optimistic about their futures that they have begun paying strong dividends to shareholders. After recently increasing their dividends, both Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co (NYSE:JPM) outpace the broader market in terms of dividend yield. To illustrate, whereas the S&P 500 Index as a whole yields about 2%, both banks offer yields of approximately 2.75% at recent prices.
Meanwhile, Bank of America Corp (NYSE:BAC) still pays shareholders just one penny per share in dividends, amounting to a paltry yield of just a fraction of one percent.
Stick with the best banks
Bank of America may sort out its current legal issues and come through this recent incident unscathed. The bottom line, however, is that investors simply don’t need to take the risk. There are other bank stocks to choose from that are performing better than Bank of America Corp (NYSE:BAC).
Specifically, Wells Fargo and J.P. Morgan Chase are raking in profits and are funneling more of these profits to shareholders in the form of increased dividends and share buybacks.
This stands in stark contrast to Bank of America Corp (NYSE:BAC), which has yet to raise its dividend above a token payout, and is on much more shaky financial footing than its two rivals due to recurring legal bills.
As a result, prudent investors may want to give preference to Wells Fargo and J.P. Morgan Chase among the big bank stocks.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Bank Just Can’t Stay Out of Trouble originally appeared on Fool.com and is written by Robert Ciura.
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