Bank Of America, Wells Fargo: Which Preferred Stocks Are Not Like The Others?

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Includes: BAC, WFC
by: The Unhooded Falcon

Summary

Most preferred shares from major banks either carry low yields or trade above liquidation value and are subject to calls.

Two preferred stocks, one from Bank of America one from Wells Fargo, offer yields in excess of 6% without call risk.

This presents an attractive opportunity compared to the other preferred shares from major U.S. based banks.

Finding quality yield in the current interest rate environment is difficult for many investors. As a result many have turned to big bank preferred stocks such as those from Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC).

But almost all preferred series from these banks either carry low yields or trade above liquidation value while carrying call risk. Fortunately for income investors, Bank of America and Wells Fargo each have a unique preferred stock series that offers yield while avoiding call risk.

Necessary trade-offs?

As is typically true with investments that carry the same risk, higher yields carry higher prices. In the case of the preferred shares from Wells Fargo and Bank of America this means all the publicly traded series yielding over 5% trade above liquidation value. Investors buying these preferred stocks then face the additional risk that the banks may call their preferred stocks at liquidation value which they can do for all the preferreds noted in the graphs below.

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Alternative preferreds

Income investors do have alternatives with Bank of America and Wells Fargo by purchasing each company's Series L preferred stock. These shares do not have a call date but they do each carry yields in excess of 6%.

Bank of America Series L Preferred (BACpL) last traded at $1,129.69 per shares giving it a 6.42% yield. While this does put the preferred above its $1,000 per share liquidation value, it's non-callable and acts more like a perpetual security. Not only that but it's also one of the highest yielding preferreds from the bank.

The bank does have the ability to convert Series L to 20 common shares but only if the common stock trades 30% above the $50 per share conversion price. This means that Bank of America could only convert Series L to common if the common shares top $65 each (from the current $13.79) and even then it would give Series L shareholders $1,300 of common stock for a 15% gain over the current Series L price.

Wells Fargo Series L Preferred (WFCpL) has many similarities with Bank of America's Series L as they both have a $1,000 liquidation value, are non-callable, and can be converted to common at a level far above the current share price. Trading at $1,190 with a 6.3% yield, Wells Fargo Series L trades at a slightly greater premium and with a lower yield likely reflecting less risk from Wells Fargo than Bank of America.

Wells Fargo Series L can be converted to 6.3814 common shares but only if the common stock trades 30% above the $156.71 conversion price thus requiring common shares to hit $203.72 before Wells Fargo can force a conversion. With common shares currently at $50.54, that share price is a long way off and even if it were hit Series L shareholders would see a 9.2% gain from the current Series L trading price.

Risks

Although Bank of America Series L and Wells Fargo Series L both avoid call risk, they still carry other preferred stock risks. Both still require that the underlying companies stay solvent and be able to continue paying the preferreds. It should be noted that both preferreds are non-cumulative meaning missed dividends do not have to be made up. However, major banks are highly incentivized to continue paying preferred dividends since having suspended preferreds would hurt efforts to access capital markets as major banks frequently do. Even during the 2008 financial crisis, neither Bank of America nor Wells Fargo suspended preferred dividends or even common stock dividends.

The preferreds also carry interest risk and could lose value if interest rates rise. This is true of nearly all fixed rate securities and investors expecting higher interest rates should consider the floating rate preferreds from Bank of America.

Takeaway

Most high yielding preferred stocks from major banks trade above liquidation value putting them at risk of losing value in the event of a call. But the Series L preferred from Wells Fargo and Bank of America are non-callable and avoid this risk while still yielding over 6%.

While both series still carry risks associated with fixed rate bank preferreds, they are worth considering for investors expecting low interest rates and looking to avoid call risk.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BACPL over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author does not guarantee the performance of any investments and potential investors should always do their own due diligence before making any investment decisions. Although the author believes that the information presented here is correct to the best of his knowledge, no warranties are made and potential investors should always conduct their own independent research before making any investment decisions. Investing carries risk of loss and is not suitable for all individuals.