BofA, Wells Fargo, Citi: Preferred Stock Analysis

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Includes: BAC, C, WFC
by: Preferred Research

Looking at the convertible preferred stocks of three large banks tells us a lot about the banks themselves. Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) have very similar $1000 par convertible, non-cumulative preferreds trading at similar prices.

BAC.pr.L is $1000 par and has a 7.25% stated yield. The shares closed Friday at 800 for a 9.06% current yield. The conversion into BAC common is $50, so that isn't much of a factor in the price. Some institutional owners of this preferred were offered an exchange into BAC common back in May. This preferred was not part of the most recent exchange offer.

WFC.pr.L began life as a Wachovia Bank preferred. It closed Friday at 765 and has a 7.5% stated yield. The current yield is 9.8%. The preferred can be converted into 6.38 shares of WFC common, so again conversion is not much of a factor in the price, even less of a factor than for BAC. Wells Fargo has not made an exchange offer for any of its outstanding preferred securities.

There is a consensus that WFC is in better shape than BAC. The prices of the preferreds seem to argue against this. The BAC preferred trades at a lower current yield. I think that this is telling us that WFC has more problems and/or BAC has fewer problems than the general perception. Maybe the Golden West part of WFC will be a larger problem and Merrill and Countrywide will work out better for BAC than currently expected.

That leaves Citigroup (NYSE:C), which currently has an active exchange offer which includes the C.pr.I ($50 par, 6.5% stated yield) which closed at $28.92 with a 11.24% current yield. Citi is currently offering to exchange 13.07 shares of common for each share of this preferred.

Based on the $2.59 closing price of C, this offer is worth $33.85, quite a spread. I expect that Citi will accept all of the shares that are tendered, so in the absence of other factors, C should be trading around $2.25-2.30.

If you own this preferred you should tender or sell. Citi intends to eliminate the dividend and its preference and delist the securities when the exchange offer is completed. Nothing good about that.

My recommendation is to watch for an opportunity to buy either the BAC or WFC preferreds on a small pullback. The yields are good and the conversion, while currently remote, is ultimately an additional benefit.

Disclosure: No positions. I do business with BAC, C, WFC.