Good Article On BAC- Gurufocus - Tim Travis

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Tim Travis is a veteran deep value investor and money manager. Travis has extensive experience in traditional investments such as stocks and bonds, in addition to having a unique methodology of combining options and distressed investing with value investing to generate income, reduce risk, and... More

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Good Article On BAC- Gurufocus 1 comment

Mar 12, 2012 2:18 PM | about stocks: BAC

This author did an excellent job outlining the investment thesis for Bank of America. His premise is that the warrants are more attractive than the common stock due to the inherent leverage involved, but I tend to disagree because a large percentage of future profits are likely to be paid out via dividends, and I'm more comfortable allocating a substantial amount of money to an investment when time decay is not constantly working against me. Bank of America has really improved since the departure of Ken Lewis and the promotion of Brian Moynihan to CEO, as they have made tremendous strides at improving capital ratios. In three years I believe Bank of America could be paying out approximately $1 a share in dividends which would be a relatively small payout ratio of 50%. With the stock trading at about $8 a share, the yield would be 12.5%, and the earnings yield would be 25%. Of course the stock would likely be far higher assuming they are earning $2 a share, but by getting in at these cheaper prices and being patient, you are ensuring yourself an extremely low cost basis.
http://www.gurufocus.com/news/167450/why-invest-in-bank-of-america-common-stock-when-you-can-invest-in-bofa-warrants
Disclosure: I am long BAC.

Stocks: BAC

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ericmsft Comments (75)

Tim,
The special thing about the BofA warrants is that the strike price is adjusted whenever the quarterly dividend exceeds 1 cent per quarter.

So if they pay a 25 cent quarterly dividend, the strike price of the warrant falls by 24 cents each quarter.

Therefore, listing the dividend as a reason not to own the warrant is a bit odd, unless you didn't realize this feature of the warrant.

- Eric

You wrote:
"His premise is that the warrants are more attractive than the common stock due to the inherent leverage involved, but I tend to disagree because a large percentage of future profits are likely to be paid out via dividends"

13 Mar 2012, 01:32 PM Reply Like