BofA Sees Nvidia Valuation Boost from Higher Payouts

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Analysts Flag Capital Returns as Re-Rating Opportunity

Ramping up shareholder payouts may be the next major driver for Nvidia Corporation (NASDAQ:NVDA) stock, according to Bank of America analysts. In a note published Monday, the team led by Vivek Arya argued that a more assertive capital return policy could attract a broader range of investors and help reduce what they view as an unwarranted valuation discount.

“Increased cash returns could signal sustainability, widen the shareholder base, and help narrow the valuation gap,” the analysts wrote.

They contend that Nvidia’s current capital allocation stance is a key factor holding back a fuller market re-rating, despite its dominant size within the U.S. equity benchmark.

Valuation Gap Despite Trillion-Dollar Market Cap

Nvidia is the largest company in the S&P 500 by market capitalization at approximately $5.08 trillion, yet Bank of America notes that the stock trades at a substantial discount to its Magnificent Seven peers on a price-to-earnings basis.

The analysts emphasized that this relative discount is even more pronounced when evaluated on a free cash flow basis. Bank of America estimates that Nvidia will generate over $400 billion in free cash flow combined in 2026 and 2027. They characterize that figure as roughly on par with the combined free cash flow of Apple Inc (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), yet they say Nvidia trades at about a 30% lower market cap-to-free cash flow multiple than those two companies.

Dividend Policy Seen as Key Constraint

Bank of America identifies Nvidia’s modest dividend as a central issue in its current positioning within equity income strategies. The stock’s dividend yield is only 0.02%, which the analysts describe as nearly negligible, and they say that has contributed to its limited presence in income-focused portfolios.

“Based on equity income funds, NVDA is owned by only 16% of funds while tech peers are owned (depending on market cap but likely also dividend yield) by an average of 32% of funds (range of 9% to 57%),” the analysts noted.

“The peer group currently generates an average 0.89% dividend yield versus NVDA’s token 0.02% yield,” they added.

They argue that Nvidia could move its dividend yield closer to a 0.5% to 1% range, aligning more closely with Apple’s 0.4% and Microsoft’s 0.8%. According to their calculations, this would require deploying only $26 billion to $51 billion, representing 15% to 30% of projected 2026 free cash flow.

Current and Historical Cash Return Levels

Over the past three years, Nvidia has returned 47% of its free cash flow through dividends and share repurchases, the analysts said. That payout ratio is well below an estimated peer average of around 80%, and also trails Nvidia’s own historical average of 82% between 2013 and 2022.

Bank of America suggests that bringing Nvidia’s capital return metrics closer to peer norms could be a meaningful signal to the market and potentially support a re-rating closer to other mega-cap technology names.

Index Concentration and Competitive Landscape Also in Focus

The analysts also caution that factors beyond capital returns may be weighing on Nvidia’s stock. They note that Nvidia’s representation in the S&P 500 has risen to about 8.3%, exceeding earlier peak index weights seen for Apple and Microsoft. That elevated concentration, they say, may limit additional flows from investors who manage portfolios relative to the benchmark.

At the same time, the competitive environment remains a concern. Bank of America points to rising competition from Advanced Micro Devices, Inc. (NASDAQ:AMD) and from custom chips developed by Broadcom Inc (NASDAQ:AVGO), Alphabet’s Google (NASDAQ:GOOGL), and Amazon.com, Inc. (NASDAQ:AMZN). Even so, the firm expects Nvidia to maintain more than 70% AI value share.