Bank of America Shares Now Worth Less

By Charles Rotblut

Bank of America Corp. (BAC) shareholders, your shares are now worth less than they were just two weeks ago.

Yesterday, the banking conglomerate announced that it sold 1.25 billion shares at an average price of $10.77.

The most obvious takeaway is that the sales were transacted at below market prices, or at least below the average closing price of the past 2 weeks. In other words, the buyers didn't think that BAC shares were worth the current price of $11.25. That's not good, but it gets worse.

Thanks to the secondary offering, existing shareholders now own less of BAC. To fully understand the implications, let's look at the math.

As of April 30, Bank of America had 6.40 billion shares outstanding. Multiplying this number by the consensus earnings estimate of 44 cents per share gives us a projected net income figure of $2.816 billion.

The net income figure does not change, whether there is 1 share outstanding or if there are 10 billion shares outstanding. What does change, however, is what portion of income each shareholder is entitled to.

The secondary offering increases shares outstanding to 7.65 billion shares. Dividing this number into the net income figure of $2.816 results in earnings per share of 37 cents per share -- a 15% decrease.

Remember, the net income pie has not change, just your slice of it. And your slice is now 15% less than what it was just 2 weeks ago.

Worse yet, BAC still remains far short of meeting the funding requirements required by the stress tests. None of this is good news for shareholders.

Comments

[BDHPlayer:]

Your wrong on the net income pie. The net income does increase by the earnings on the cash received, as well as, leveraging the cash received.

The question is whether earnings per share will increase or decrease because of the additional shares issued.

May 20 04:03 PM

[Ranchr:]

ZZZZZZZZZZZZZZZZZZZ What? ZZZZZZZZZZZZZ

Tell us something that requires a rocket scientist not 10 key calculator. Oh, BTW, the stock was $37 last fall given the dilution we are about 1/3 of where the stock was just 8 months ago. Those of us that bought sub $6 as still happy campers and with reasonably tight stops, I'm long.

May 20 04:05 PM

[Gelutah:]

The author of this piece is clearly an idiot since he knows nothing about analysis of this company's earnings power with the new capital,despite the initial share dilution. Thats the problem with this medium. Its given a voice to total fools.

May 20 04:25 PM

[Long Holder:]

Did you get pay to write this article for short sllers (I guess you did). I really don't care if there is a little bit of dillution now. I am long and I am looking at the next 5 years and all the money I can earn from this stock.

May 20 04:27 PM

[mrl14:]

LOL someone is a little jealous he missed the run up from $3.

May 20 04:49 PM

[See through it:]

The author of this piece is clearly an idiot since he knows nothing about analysis of this company's earnings power with the new capital,despite the initial share dilution. Thats the problem with this medium. Its given a voice to total fools. (I copied this from above because it's so true). What a piece of rubbish.

May 20 05:10 PM

[SugarDaddy:]

EPS, always goes south with more dilution, normal, what are the rest of you brainacs thinking.

IMHO, anyone long BAC must have their heads examined for being at the wrong table in this big casino. By November you will see it clearly.

May 20 05:45 PM

[Rajib Banerjee:]

I bought BAC for 11.10 per share and saw it grow till 12.23. I am optimistic and will hold it for long. Any suggestions ?

May 20 10:42 PM

[Fighting Yoda:]

BAC equity is certainly getting diluted, should have negative impact on EPS and hence valuation. I don't know why investors would queue up to buy a stock at its recent peaks - up 300% from recent lows. Beats me, I guess institutions and pension funds (your money) gets plowed into these kinds of deals.

May 20 10:57 PM

[Fighting Yoda:]

Rajib:
Don't buy stocks when they hit their highs.


On May 20 10:42 PM Rajib Banerjee wrote:

> I bought BAC for 11.10 per share and saw it grow till 12.23. I am
> optimistic and will hold it for long. Any suggestions ?

May 20 10:58 PM

[Rajib Banerjee:]

How to decide that the stock has reached its high ?


On May 20 10:58 PM Fighting Yoda wrote:

> Rajib:
> Don't buy stocks when they hit their highs.

May 21 10:28 PM

[teziman:]

I think, overall this is not good because of dilution and it will effect EPS. The reason Mangt was in hurry to acquire more capital was because of stress test and would like to show that they can still generate more cash. It will effect all the present shareholders. If i am in profit, i would sell to book some profit.

May 22 12:48 PM