This could be the next catalyst for Nvidia stock, according to BofA

Investing.com -- Ramping up cash returns to shareholders could be the next re-rating catalyst for Nvidia, Bank of America analysts said Monday.

Analysts led by Vivek Arya argue that a more aggressive capital return program could broaden the chipmaker’s investor base and help close a valuation gap that they see as unjustified. 

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

Despite being the S&P 500’s largest company by market capitalization at roughly $5.08 trillion, Nvidia trades at nearly a 50% discount to its Magnificent Seven peers on a price-to-earnings (P/E) basis — 26 times and 19 times 2026 and 2027 estimates, respectively, compared to a peer average of 49 times and 41.5 times, the analysts highlighted.

The discount is even steeper on a free cash flow (FCF) basis. BofA estimates Nvidia will generate over $400 billion in free cash flow across 2026 and 2027 combined — roughly equivalent to Apple and Microsoft combined — yet trades at about a 30% lower market cap-to-FCF multiple than those two companies.

The analysts point to Nvidia’s dividend yield as a key problem. At just 0.02%, it is nearly nonexistent, which they say has left the stock largely absent from income-oriented 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. 

The team argues Nvidia could consider lifting its yield toward 0.5% to 1%, in line with Apple’s 0.4% and Microsoft’s 0.8%, requiring only $26 billion to $51 billion — or 15% to 30% of projected 2026 free cash flow. 

Over the past three years, Nvidia has returned just 47% of free cash flow through dividends and buybacks, well below the roughly 80% average of peers and below Nvidia’s own historical average of 82% from 2013 to 2022.

The analysts acknowledge that capital returns are not the only weight on the stock. Nvidia’s weighting in the S&P 500 has climbed to approximately 8.3%, above prior peaks for Apple and Microsoft, which may limit incremental buying from index-aware investors. 

Rising competition from AMD and custom chips from Broadcom, Google, and Amazon also remains a concern, though BofA expects Nvidia to hold more than 70% AI value share