THE CRITICS

have been less than kind.

"In the penalty box two minutes for overpaying," sniffed Fox-Pitt Kelton analyst Jon Balkind.

"Not Cheap," decreed Natexis Bleichroeder analyst Dion Darham.

"Why Fleet?" wondered Ragen MacKenzie analyst Jay Tehera.

Bank of America's Oct. 27 announcement of its plans to buy FleetBoston Financial for $47 billion treated its shareholders to a fat-kid-on-the-see-saw effect. Shares on their side of the deal slumped 10% by day's end, while Fleet stock sprang 23% higher. (None of these analysts own shares of Bank of America or FleetBoston Financial; none of their firms have an investment-banking relationship with either company.)

The deal may be old news, but Bank of America's now-slimmer share price has flattered its dividend and caught our attention. The stock's 4.2% yield was among the reasons it turned up in our recent search for income stocks.

Our New Income screen, of course, looks at more than just dividends. Of equal importance is the ability to continue paying them. One of the ways we judge this is by looking at the payout ratio, or the percentage of earnings being paid out to shareholders. Stocks with payout ratios above 75% don't have enough of a cushion to absorb an earnings hiccup without slashing their dividends. When that happens, well, let's just say that it's not too difficult to figure out which day Eastman Kodak's dividend was cut when looking at its stock's .

Note, too, that our New Income screen isn't about finding the biggest yields out there. That's for bond or preferred-stock investors. We look instead for companies that have shown a good record of earnings growth and total return, the kind of companies that would be worth a look even without the dividends.

We used our stock-screening tool to rummage through 8,300 stocks in search of those with yields greater than the Standard & Poor's 500 index's median of 1.75%. Payout ratios, of course, had to be below 75%. We also demanded that each stock's total return over the past five years had topped the index's median of 20.7%. Earnings had to be up year-over-year in 2003 and projected to rise higher still in 2004. Forward price/earnings multiples had to be below the S&P 500 median of 18.12.

We had some other requirements. See the recipe on the right for all of them. Our search had a rather high yield of its own 18 companies, among them Bank of America.

Analysts seem to agree that the Fleet deal's strategic importance is clear, while the financial benefits are not. Fleet gives Bank of America an overnight footprint in the Northeast. (For maximum panache, always use the word "footprint" when discussing bank mergers.) The trouble is, Fleet on its own had already pretty much saturated the region with branches. And its efforts in recent years to diversify nationally into corporate lending and brokerage have produced high credit costs and largely disappointing results.

"In short, the company faces limited growth opportunities." wrote Ragen MacKenzie's Jay Tejera in an Oct. 28 research note. "It is easy to see why Fleet would want to sell."

The deal works out to about $41 a share for Fleet (down from $45 thanks to Bank of America's decline). That's 15.8 times Fleet's 2003 earnings, rich considering that Bank of America trades at a multiple of 10.7. Bank of America says, though, that the deal will pay for itself within a year, diluting 2004 earnings 2% but tacking on an additional 1% in 2005 thanks to annual cost savings of $1.7 billion.

That assumption may be a touch optimistic, says A.G. Edwards analyst David Stumpf. "In the FBF deal BAC is amortizing its estimated $5.7 billion core deposit intangible over 10 years using the straight line method," wrote Stumpf in an Oct. 29 research note. "In other large purchase deals, including First Union/Wachovia and BB&T/First Virginia Bank, the acquirer used an accelerated method over a shorter seven-year period." Figured using the more common method, says Stumpf, earnings would take a 3% hit from their previous 2005 projection rather than a 1% gain.

So the Fleet deal seems unappetizing. Here's why Bank of America's stock looks tasty anyway.

It's cheap. That 10.7 P/E we mentioned is well below the money-center-bank average of 13.8. Analysts, meanwhile, project that Bank of America will increase earnings by an average of 9% annually over the next five years just slightly slower than the group's 10% rate. That gives the stock a price/earnings-growth, or PEG, ratio of 1.19, less expensive than either peers' 1.38 or the S&P 500's 1.70.

And the dividend is safe. Combined earnings in 2004 should be about $14 billion, of which only 45% would be needed to cover the current dividend-payout level. Fleet brings enough excess capital to the merger, in fact, that the new company says it will purchase 63 million of its own shares in 2004 and an additional 23 million in 2005.

Finally, Bank of America is done buying banks for awhile. The combined company will have a 9.8% national market share in savings deposits. The government imposes a limit of 10% on market share gained by acquisitions. So while the company can work at juicing its capital markets, money-management and corporate lending segments, its growth in deposits (on which consumer lending depends) will have to come organically. Just the way shareholders like it.