Interested in Bank of America? Consider the Preferred Shares

If you are confident that Bank of America (BAC) won't go out of business, won't eliminate its dividend, and that its share price will eventually recover, you may want to consider buying its convertible preferred shares (BAC-PL) to wait out the storm.

Bank of America's convertible preferred (Series L) pays an annual dividend of $72.50 per share in quarterly installments. Series L's recent price is around $837 a share. That makes its yield over 8.6%. Unlike the majority of preferred stocks, which treat their payouts as interest payments, Series L pays a dividend eligible for the 15% tax rate for qualified dividends.

Each Series L share converts to 20 shares of common stock any time at the holder's option. See the prospectus for details.

Series L's 52 week low, which it made on 7/15/08, is $750.25. Its 52 week high, made in February 2008, is $1,168.

If you're considering buying BAC's common shares as they slump because you think BAC will survive and its dividend will not be eliminated, keep an eye on Series L. It may be the safer bet. First, you'll get a pretty good dividend that's safer than the common stock's. Some analysts expect BAC to lower its common share dividend before the credit crisis is over. Second, when (if) the common shares recover, you can convert to them.

If I were looking to buy Bank of America stock (I'm not, at least at current prices), I'd buy it through the preferred.

Things to Note

If you are interested, you must read the prospectus.

At Bank of America's option, the preferred stock can be bought back by the company for $1,000 a share on or after 1/30/13.

If BAC's board does not declare a dividend or fails to pay a dividend, holders of the preferred stock will not be entitled to a dividend that quarter. The preferred stock is non-cumulative. Any unpaid dividends will not accumulate, and won't be paid at a future date.

If the price of the common stock exceeds the conversion price by 130% on or after 1/30/13 for 20 of any 30 consecutive days, Bank of America can force the conversion of preferred stock into common stock.

Disclosure: I hold no positions in any securities mentioned above. 

Comments

[Delojozafado:]

BAC also has some good adjustable rate prefereds, BACPrE,tied to LIBOR. They have default yields if LIBOR goes too low. The current dividends are very decent and of course will adjust upwards in the event that rates start to rise, as most say should start happening as early as Dec. These have a great chance to achieve a Capital gain as well from the beaten down prices they are currently at.

2008 Aug 20 08:19 AM

[Augustus:]

Yield is the same on the preferred as on the common - but a bit safer.
Premium for the preferred over the conversion price is about 50% or so. That seems darned steep to me, particularly when there is no cumulative div with the preferred. Buying $837 of the common would seem to be a better idea, IMHO.

2008 Aug 20 10:47 AM

[sumosama:]

good article, something to think about. a little concerned about the call provision, though.

2008 Aug 20 11:09 AM

[mouth:]

If BAC's board does not declare a dividend or fails to pay a dividend, holders of the preferred stock will not be entitled to a dividend that quarter. The preferred stock is non-cumulative. Any unpaid dividends will not accumulate, and won't be paid at a future date. WHAT HAPPENS THE NEXT QUARTER?" IF NO DIVIDEND, DO PREFERRED GET SHORT CHANGED AGAIN?

2008 Aug 20 12:04 PM

[BhaveshG:]

How do i buy BAC-PL? There is no ticker symbol when searched on yahoo finance and google finance. How to buythe L Series preferred from the market?

2008 Aug 20 12:09 PM

[Jon G:]

If you are looking for a more diversified approach to preferred stocks look at closed end funds HPF and PFO - both sporting near double digit or higher yields

2008 Aug 20 12:46 PM

[Delojozafado:]

Warning Will Robinson ~!!! HPF is highly leveraged. Check the leveraging of PFO. These are most likely good CEFs to own here against their discounts to NAV. You should note however the yields are a function of the shareholders getting their principle crushed over the last year.

2008 Aug 20 08:23 PM

[Delojozafado:]

HPF has an expense ratio of less than 1.2% and sels below NAV. PFO has an expense ratio of 1.56%. Both are leveraged to the tune of HPF 35% and PFO 37%. The mangers are borrowing on margin to buy more shares than the investors have invested. If rates climb on their margin ...It's a function of the auction rate securities market. Be careful. A beaten down ETF like PGF may be the better investment. No leveraging and something you can average down in over time until the underlying financials, which are supposed to be cherry picked come around. You could hedge a position like that with some SKF? There are other Preferred ETFs you can find that are broadly diversified and not leveraged. JPM-PrW is safe and has a great yield at near par value. That means investors expect them to stay in business and pay on time in full.

2008 Aug 20 08:38 PM

[Delojozafado:]

The brokers all have different formats for entering preferred quotes. On Yahoo they use a Dash. So your quote box would read BAC-PL. Other places like Fidelity the quote would be BACPRL. Others might use BAC-L or even BACPrL. Closed at $855.00 up $17.65, as a combined result of some rallying in the financials and this blog. It has a par value of $1000.00 and yields 8.48% against it's closing price. A little rich for a lot of investors. Want to go a little cheaper there's the AES-PC nice yield lots of international exposure especially to LNG projects for generation. Got beaten up from the Venezuelan thing. It is well past it's call date but gets shaken every time there is one of these Russia/Georgia things as it does a lot of Frontier country projects. At +/- $45 and well past it's call date at $50. A nice if not for widows and orphans utility.

2008 Aug 20 08:58 PM

[BAC PL:]

You said: "At Bank of America's option, the preferred stock can be bought back by the company for $1,000 a share on or after 1/30/13"

But the prospectus says: "The Preferred Stock is not redeemable by us at any time." Right on the first page.

Whag gives?

2008 Sep 08 06:15 PM

[Trusting:]

The price of BAC PRL today is $360. It was at a low of $162.57 just last week. The shares are non-cumulative thus any unpaid dividends will not accumulate, and won't be paid at a future date. When was the last time a dividend was paid on these shares? What was the pay out? Are the dividends quarterly? Thus 2.15% of $1,000 or $21.50. That makes the current yield over 20% if the dividend is paid. Are they suspending the Preferred Dividend? Is this still a good buy or is the $360 price at risk of decreasing back to $160 or less?

Mar 01 09:07 PM

[Kevin S.:]

I own Bank of America Preferred Stock (Series K) and the dividend was paid on 1.31.09. Yes, the yield on these are over 20% now, due in large part to the continuing media coverage of impending nationalization or dividend deferral. Usually, issuers cannot defer payments for more than 5 years, worst case scenario. In that case it would obviously be best to own cumulative preferreds so that you will get your money eventually. Take home message: read the prospectus before you invest. Most bank preferred stock are non-cumulative so this should be taken into consideration. A good sourse for information on peferreds and their prospectuses is quantumonline.com

Mar 05 09:47 PM