Bank of America (NYSE:BAC) thinks it will save some $500 million a year when it redeems its prefered shares. Yes cancelling the 8% plus with nose bleed yields will help. The dividends paid on preferreds will drop by one-third and earnings available to common shareholders will increase about 20%. All without changing any risk profile. Nice work.
CFO Bruce Thompson says he has no plans to replace the preferreds at this time. This begs the question. What will become the dividend on the common. They currently yield about 0.34% with the shares trading near the 52 week high. You cannot be a big money center bank and pay a lousy dividend to the common share holders.
If you believe interest rates are artificially low you would want to lock in some long-term capital at advantageous rates. Never mind about the short-term thinking of todays capital adequacy ratio. Banks and their investors need to think in five and ten-year time frames.
Lock up some long-term preferreds at low rates. Lock up some thirty year bonds are very low rates and wait for the economic cycle to make you look like a superstar. Institutions still are and always will be your largest core investors. They will understand the value narrative and buy in.
Then you will move beyond having to make sharp deals with Warren Buffett and concentrate on becoming a powerhouse.
George Gutowski writes from a caveat emptor perspective.