ERICOPOLY

"So that's a rental yield of 3% (before costs!) for real estate at an ok location in the city and it's not all that cheaper the further away you go." Similar rental yield to what I'm still paying here in Montecito. However our tax rate in California is so high that I would need to invest the home's price into a bond yielding at least 4.6%-6% in order to get that 3% after-tax. Then the income from the bond would need to rise with rental inflation, but such a bond does not exist! So to hedge against potentially high rental inflation, I must instead purchase the home. First, because you can't find equivalently low risk bonds that yield 4.6%-6%, and second because they certainly don't adjust their payouts in lockstep with rising rent. Anyways, that's why it still might be the rational thing to do -- what's the alternative? Get run over by rising rent?

Anyways, I think that's likely the reality of it. It's not like these fund managers or retail investors are going to patiently let their dividends pile up and then reinvest them once the market drops. After all, you've already argued that they don't even know it's overvalued in the first place. So they'll just reinvest the dividend. Why would they do otherwise if they can't value the stock?

All those bogle-heads just say a person should reinvest his dividends. That's probably what winds up happening. Dollar-cost averaging. In an overvalued market, (the one where you want management to pay dividends), that doesn't help your retail investor much. So he's going to buy those shares with the dividend anyway -- only because of dividend taxes he's really getting screwed... not only buying overvalued shares, but a lot fewer of them.

You don't believe a shareholder can assess when shares are overvalued? No, I think the average retail investor cannot make that assessment. They are in a position where they must trust Management to make their capital investment decisions for them (that's why CEOs make tens of millions of dollars after all.) So I do not think it is fair to blame shareholders for the actions of Management. The capital allocator of the average retail investor is a mutual fund manager. I don't think the average mutual fund manager can do it either. I think being good at spotting overvalued/undervalued stocks is really, really, really hard in truth. Maybe less than 1 percent of investors have that ability over the long-run. The mutual fund managers do however have the ability to sell an offsetting amount of shares each and every quarter if they are capable of reading an earnings release (where they mention the number of shares sold). They also have the expertise to understand what the phrase "tender offer" means and execute on it -- even if they don't understand the valuations, they could get a hint from management that the tender offer is just the new dividend system. Also, keep in mind that the average retail investor who does it on his own is instructed to "dollar cost average", which means that once he gets his dividend he just buys more shares at the market price anyhow. Only he can't afford as many after paying his dividend tax. So he gets hurt -- and in that scenario would be better off if management just bought more share on his behalf.

You don't believe a shareholder can assess when shares are overvalued? No, I think the average retail investor cannot make that assessment. They are in a position where they must trust Management to make their capital investment decisions for them (that's why CEOs make tens of millions of dollars after all.) So I do not think it is fair to blame shareholders for the actions of Management. The capital allocator of the average retail investor is a mutual fund manager. And using your term, isn't that a multi-millionaire management team?

You don't believe a shareholder can assess when shares are overvalued? And why would they not be selling their shares (perhaps to management's buyback program) when they are known to be trading at overvalued levels? Shares worth $10 are trading for $20. They know it's only worth $10, they know they could sell and pocket $20 per share, but for some reason they don't and ride it back to $10. They cost themselves $10. Management bought back $1 of shares at $20 and cost them 50 cents. You are saying that by the time they discover management's value destruction it's too late. That claim of yours makes no sense, because they've been staring at the overvalued $20 ticker for days/weeks/months/years before it collapsed. Quarter after quarter they could sell after learning of the buyback. Not much stock gets bought back in any one quarter if you are talking about a regular and habitual buyback program, so very little is on the line in any one quarter exposed to a plunge in price after purchase. Truly, it's picking nits there to complain about a small amount from one quarter -- easily smoothed over by the regular tax savings over time. And if it's a big amount in one quarter, it can certainly be neatly handled by a tender offer. There will also be times when they buy and you didn't know about it, but you luckily sell at a higher price the next quarter after reading the news of the buyback. It all balances out over time.

Agree and disagree. Investors care about earnings, but earnings go to increasing Bv/share and/or payouts. As I said Canadian Banks are protected and are therefore more profitable than Us banks. They also universally pay out higher dividends. So, using your argument, if Ry trades at 13.7 x earnings, BAC is maybe only worth 9x or 10 x earnings which gets us to 1.50 x 10= 15.00, or 18 under your scenario. Unless I see rapid improvement in the business from here on, I will be exiting most of my leap poisitions, and wont renew them this fall. I should probably sell all my Bac and invest it all in the Canadian Banks, and be done with it. With dividends they double every 4-5 years or so. Yep, I figure it's worth maybe 10x earnings at the low multiple, maybe more. So $18 perhaps at the base. Management said last fall that they could do 13%-14% ROTE in this interest rate environment. So that would put it at $19.60 at 10x earnings and 14% ROTE. Add in earnings and you get a value around $20-$22 perhaps by Jan 2016. Something like that. Perhaps it only trades at $17 or $18 by then. I'm stuck with it because of taxes and the upside to those numbers is perfectly fine by me. No point selling. I dumped 100% of it in my RothIRAs when it was over $17 early this year. I started off investing hoping I could make 10% a year. Somehow the odyssey changed course, but now I'm back to 10% a year goals again.

Well, that depends. Perhaps if the company has a large amount of capital to return, they merely announce a tender offer. It's pretty straightforward in that case. Or perhaps they regularly pay a dividend every quarter. They announce that instead they'll purchase an equivalent amount of stock each quarter instead. Quarter after quarter they buy, and quarter after quarter you sell. Sometimes you sell higher than they bought, sometimes you sell lower than they bought -- over the long run, this is just a wash. The thing though that I was primarily commenting on (that got the fortune cookie quality response) was the shareholders who say management destroyed their value by purchasing overvalued stock. Well, was it overvalued only in hindsight? If not, then why were they still shareholders at the time? Why didn't they all sell? For a stock to be overvalued, there must be a lot of shareholders who want to hold onto it at that price -- that's a given. So are those the people who cry foul later on? Let's say the stock is worth $10 and trades at $20. Later it will drop back to $10, so they cost themselves $10 per share of losses by not selling. Instead of beating themselves up over it, they will blame management for buying $1 of shares back at $20 instead of paying a dividend. So the scoreboard now reads that they cost themselves $10 but don't blame themselves, and they instead claim that management is a poor capital allocator for having wasted 50 cents. It's insane. This is why I'm saying they having nobody to blame but themselves -- the shareholders are the idiots who made the whopper of misallocation decisions by not selling at $20. Who are they to point fingers at management?

What? This doesn't make any sense. First, from a practical perspective, you don't know if Management destroys shareholder value until it does - at which point it's too late to sell your shares. Secondly, if the stock price appreciates, do shareholders take the credit for that great decision or does Management? So it's shareholder's fault if the stock goes down but Management's credit if the stock goes up? Secondly, Management is entrusted with the stewardship of a Company's capital. If I rent your house from you and then I burn it to the ground with a can of gasoline, is that my fault or your fault? Let me burn down your house and see if you blame yourself. Something tells me you'd demand I be put in prison and you'd sue the crap out of me. You make the point that value is not destroyed until it is. Please stop talking like a fortune cookie and say it in a way that I can respond to. I don't know where you are going with the bit about prices going up and down, and who takes credit for it. Nor do I understand what the burning house is referring to.

Royal Bank of Canada (RY) trades at: 2.5x book value 13.7x PE ratio Okay, so apply that PE multiple to BAC with $1.80 per share of earnings: $24.66 share price at 13.7x PE ratio 1.17x book value So one banks' 2.5x book value is another banks' 1.17x book value. Investors care primarily about the earnings.

The multiple to book metric is pretty lame. One company that grew entirely organically is going to trade at a higher price to book value versus the bank that has grown through acquisitions. The latter will have lots of goodwill on the books, the former won't. All other things being equal. So just use price to tangible book value. That's the way to compare one versus the other.

FIRREA carries a 10 yr statute of limitations. So the market might still stress out about that until the bulk of the 10 year sliding window of risk has passed. So perhaps you don't get to 12x earnings until 2017 or 2018.

How did you come up with only $3b a quarter? I personally come up with more like $1.80. I just did a very quick $2.19B this quarter+ $800m less in LAS expense = $3B -- perhaps over simplifying this. This past quarter had a $4b pre-tax litigation expense that cost them 0.22 per share after-tax. See slide 2 on the second quarter earnings presentation: http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations&cm_re=EBZ-Corp_SocialResponsibility-_-About_Us-_-EI38LT000E_About_Us_Presentations#fbid=Y0WdP0s6CkV Thanks.. I missed that. So we could be looking at $1.8 ~ $2.0 EPS per year assuming no further legal expenses... and assuming the interest rate stays where it is... the economy stays where it is. The million dollar question now is what would be a fair multiple - Some people like book value multiple. Some like 12x or 15x perhaps as the Bank is now 'safer'. This could mean $25 - $30/share by 2016. My opinion is that it will trade based on earnings. Somewhere from 10x to 12x. Then there is the excess capital that will be generated from the NOLs, and the capital freed up by the disallowed DTAs, and the capital freed up as they wiggle their way through their bad real estate loans. They use that freed-up capital to retire shares or pay dividends that you use to buy more shares (effectively the same thing). So I don't know. I think it's more than $1.80 per share when you consider that you'll either have fewer outstanding shares or more shares in your portfolio once that freed up capital materializes.

How did you come up with only $3b a quarter? I personally come up with more like $1.80. I just did a very quick $2.19B this quarter+ $800m less in LAS expense = $3B -- perhaps over simplifying this. This past quarter had a $4b pre-tax litigation expense that cost them 0.22 per share after-tax. See slide 2 on the second quarter earnings presentation: http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations&cm_re=EBZ-Corp_SocialResponsibility-_-About_Us-_-EI38LT000E_About_Us_Presentations#fbid=Y0WdP0s6CkV So pre-tax income was $7b (excluding the litigation expense). The normal level of quarterly litigation expense is higher than $0 but less than $4b.

How did you come up with only $3b a quarter? I personally come up with more like $1.80 per share earnings. The executives stated that they can make 13%+ return on tangible common equity in this environment when the expenses normalize. So that's $1.80 (0.13 x $14).

I believe Bank of America has an official complaint center to handle these kinds of customer focused issues: Office of the Associate Attorney General (202) 514-9500 ask for Tony West

The latest conference call seemed to imply that LAS expenses would normalize sometime around early 2016. That would shave about 800m off the current quarterly LAS expense, but there will likely be some revenue hit as well.

It's a moral hazard dilemma. Everybody knew that Cointrywide was writing NINJA quality loans. The purchasers of their MBS enabled the fraud to continue. So they deserve a share of the losses -- next time, perhaps they'll remember this. Thus, the market may choose to not purchase securitizations from the next Countrywide to come along.

I've never fully understood why non-cash stuff costs less than cash. For example, if I buy a house for $200,000 and then have the house seized by the DOJ, I've still lost $200,000 since I could sell it for $200,000 once again had they not taken it. So... I'm going to make a guess... They have mortgages with $200,000 principle value on the books but the loans are non-performing and the asset values are underwater. So they "give" some $50,000 of the principle value to the borrower as "mortgage relief". The loan was already marked-down down on the books as $150,000, so the loss is now being formalized even though the hit was previously taken in a prior quarter when written down. Is that basically it?

Well of course the shares represent a higher ownership stake. There is no "but". That's the whole point -- you can sell some to get the offsetting amount of cash (tax-advantaged "dividend"), and yet maintain the same ownership stake. That's an identical amount of cash as you'd get with a dividend, and an identical remaining ownership stake. The only difference lies in the taxes you owe. Yes of course they do. There is nothing "missing" in my account. This new shareholder (if it's not the company itself) will be thrilled to be treated in a more tax-efficient manner. loop() { company stock buyback offsetting share sale by investor (creating new shareholder potentially) } The new potential shareholder just lives in this loop like the rest of us.

That's absurd. Any buyback will increase the value of that share. No dividend ever will. You appear to be saying that the management only cares about the value of the share itself, and not the enrichment of the shareholders.

I think where you get tripped up is you assume a non-sale of stock by an investor. This too is irrelevant to management's decision. Their decision is merely to return capital to shareholders. One method has an observable tax advantage over the other. The people who sell an offsetting amount want the cash, the ones who don't sell an offsetting amount likely prefer the tax-advantaged reinvestment at current prices.

Yes, there would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash. With the difference that in case 1 you're left with a stock price of $14. Okay, now (to fix both cases in my example) you could also comment on case 2 where you would also arrive at a total value of $15. You fixed the first case but not the second. Were you to fix both, you'd have $15 left in both scenarios, but after paying taxes in case 1 you'd only have $14.67. So it's $14.67 vs $15? I'll take $15 every time. Meaning... every time. Don't care where the stock is trading, I just want more money every time. You are assuming a sale of stock by an investor, which is irrelevant to management's decision making. From management's perspective, share transactions only matter when they are with the company - when shares are issued, and when shares are bought back and cancelled. Otherwise, there is a shareholder and it's the company's job to maximize value for him. So here's BAC's perspective. Say they' start with 10 billion shares out - you have two options. (1) Buy back 1 billion shares. My duty in this scenario is to my continuing 9 billion shareholders and I'm giving them each an extra stake in the company - a REINVESTMENT of continuing shareholder capital. (2) Dividend equivalent cash. I still have 10 billion continuing shareholders and I've RETURNED their capital that I couldn't use. Either my continuing shareholder has their stake + cash, or an increased stake. Clearly, if BAC is overvalued, my continuing shareholder should prefer the return of cash. The key is, from BAC's perspective its shareholders CANNOT SELL stock except to the company - they can change identity, but they continue to exist. In short, the only way continuing shareholders can get cash out of a company is through dividends. A person who sells an offsetting amount of shares is a "continuing stakeholder". You claim management's duty is to continuing stakeholders. It's the ownership % that matters. A person who sells some offsetting amount of stock is not an "exiting shareholder". He is merely keeping his ownership unchanged and would like management to serve his best long term interests -- distributing capital in the most tax-efficient manner is doing exactly that.

Yes, there would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash. With the difference that in case 1 you're left with a stock price of $14 and in this way get $1 of tax free price appreciation (potentially). I understand your point now with the edit. You're saying that potentially one day the capital gains taxes will be less. That's true mostly... however deferred-taxation leads to better compounding results over time. Also, here in the US you get a free step-up in cost basis when you die (or your wife if you live in community property state), so there won't be any capital gains taxes due at all in that case. There will also be times when you sell the BAC shares below your cost basis... say management buys them back at $10 and you sell at $10. So you'd have a $5 per share capital loss to deduct against the dividends that you are getting elsewhere in the portfolio. So that really makes the math sweet -- instead of paying 33% on the dividend, you'll have a lower tax bill on the other dividends that you are collecting. So the difference in cash could be well over 50%.

Yes, there would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash. With the difference that in case 1 you're left with a stock price of $14. Okay, now (to fix both cases in my example) you could also comment on case 2 where you would also arrive at a total value of $15. You fixed the first case but not the second. Were you to fix both, you'd have $15 left in both scenarios, but after paying taxes in case 1 you'd only have $14.67. So it's $14.67 vs $15? I'll take $15 every time. Meaning... every time. Don't care where the stock is trading, I just want more money every time.