BAC-WT - Bank of America Warrants

[StubbleJumper]

I believe BAC is quite attractive - in US $ terms

 

As a Canadian... it's now actually more expensive than it was at these levels a while back when the exchange rate was around $1.2...

 

$15.75 x 1.2  = $18.9 CAD/share

$15.75 x 1.41 = $22.2 CAD/share 

 

We've been making money south of the border here LOL.....

 

I also learned that unless BAC shares are held in the Canadian registered retirement account (RRSP);  we will be paying the taxes on BAC shares as if they were income... so for some investors that's still working full time; it could mean 25 - 40%.....    albeit one can deduct the 15% withholding tax  the US government takes & also the gain can be reduced against interest paid if one uses margin... 

 

Still; my rough math seems to suggest if they ever pay a $2 dividend/buyback; one uses leverage could still get about 20% after tax return  just on the free cash returned to the shareholders alone; without any multiple expansion.... not too shabby.

 

 

Or you can simply buy the BAC TARP warrants and you effectively get the dividend through adjustments to the warrant strike price.  For Canadians, you'll just end up with a capital gain at some point in the future which is taxed at a much more favourable rate than a foreign (non-eligible) dividend.  US residents apparently have to pay tax on the strike price adjustments as they occur.

 

 

SJ

[Hoodlum]

I bought the common today at $15.50 near the market close.  If it keeps going lower then I'll sell the common and buy BAC calls.

[bbarberayr]

I feel a little like we've got a value trap here. We've got a company that's 40% below book value. They are buying back $800 million of stock per quarter, which is accretive to per share book value... On top of this, the Fed won't allow them to distribute all of their earnings, so book value is rising even more. It seems like this should be a slam dunk investment... However, this situation has existed for years  now.

 

Perhaps I'm doing the right thing, or perhaps I'm the idiot here, but I was buying today.

 

Seems like 2016 may finally be the year where the market goes from rewarding growth to liking value and stocks like BAC should do well, plus their earnings should increase with their margins.

[ERICOPOLY]

Eric,

 

what are you thinking about the warrants today?

 

I was out skiing all day.  Just got back in.

 

I don't remember where to look to find the warrant's current strike price (it has been adjusted for dividends).  I think it's at about $13.02 though today after 7 quarters of 4 cent adjustments.

 

$13.02+$5.07 = $18.09.

$18.09 - $15.50 = $2.59

 

So there is $2.59 of premium in the warrant.

 

A warrant is similar to a married put strategy.  In this case, it's like having common married to a $13.02 put that expires in 3 years.

 

But you could do a similar thing buying the common and the January 2018 put -- a 2 year married put strategy. 

The premium is about $1.30 for the 2 year put.

 

Okay, so why does the premium in the warrant cost twice as much for what amounts to only 50% more time?  It looks like a rip-off in my opinion.

 

EDIT:  Okay, some of the difference is the embedded margin interest in the warrant.  I'm spoiled by the Interactive Brokers margin rates I guess.  The warrants are not so bad if you are in an IRA account where you can't have margin loan or are with a high interest margin program.

[tradevestor]

BAC-WT (expiry Jan, 2019 exercisable at $13.11 = $5.10

BAC price = $15.50

Premium  = ($13.11 + $5.10 - $15.50) / $15.50 = 17.48%

 

WFC-WT(expiry Oct 2018 exercisable at $33.92 = $16.94

WFC price = $50.40

Premium = ($33.92 + $16.94 - $50.40)/$50.40 = 0.91%

 

Ignoring dividends and 3 months exercise date, does anyone know why there's such a difference in premium between the two ?

 

[Hawks]

Also added to my BAC common today.

[racemize]

BAC-WT (expiry Jan, 2019 exercisable at $13.11 = $5.10

BAC price = $15.50

Premium  = ($13.11 + $5.10 - $15.50) / $15.50 = 17.48%

 

WAC-WT(expiry Oct 2018 exercisable at $33.92 = $16.94

WFC price = $50.40

Premium = ($33.92 + $16.94 - $50.40)/$50.40 = 0.91%

 

Ignoring dividends and 3 months exercise date, does anyone know why there's such a difference in premium between the two ?

 

The degree to which the WAC-WT are in the money.

[gary17]

BAC-WT (expiry Jan, 2019 exercisable at $13.11 = $5.10

BAC price = $15.50

Premium  = ($13.11 + $5.10 - $15.50) / $15.50 = 17.48%

 

WAC-WT(expiry Oct 2018 exercisable at $33.92 = $16.94

WFC price = $50.40

Premium = ($33.92 + $16.94 - $50.40)/$50.40 = 0.91%

 

Ignoring dividends and 3 months exercise date, does anyone know why there's such a difference in premium between the two ?

 

The degree to which the WAC-WT are in the money.

 

So for similar degree of leverage (3x); WFC warrants seem much better deal than BAC Warrants!? 

 

[gary17]

I believe BAC is quite attractive - in US $ terms

 

As a Canadian... it's now actually more expensive than it was at these levels a while back when the exchange rate was around $1.2...

 

$15.75 x 1.2  = $18.9 CAD/share

$15.75 x 1.41 = $22.2 CAD/share 

 

We've been making money south of the border here LOL.....

 

I also learned that unless BAC shares are held in the Canadian registered retirement account (RRSP);  we will be paying the taxes on BAC shares as if they were income... so for some investors that's still working full time; it could mean 25 - 40%.....    albeit one can deduct the 15% withholding tax  the US government takes & also the gain can be reduced against interest paid if one uses margin... 

 

Still; my rough math seems to suggest if they ever pay a $2 dividend/buyback; one uses leverage could still get about 20% after tax return  just on the free cash returned to the shareholders alone; without any multiple expansion.... not too shabby.

 

 

Or you can simply buy the BAC TARP warrants and you effectively get the dividend through adjustments to the warrant strike price.  For Canadians, you'll just end up with a capital gain at some point in the future which is taxed at a much more favourable rate than a foreign (non-eligible) dividend.  US residents apparently have to pay tax on the strike price adjustments as they occur.

 

 

SJ

 

Hi SJ - this is precisely one of the key reasons I bought warrants instead of using margin to buy common shares.  And in fact having the warrants in my registered account means I theoretically won't be paying any taxes until I am retired. 

 

It is good to see another view that's consistent with mine.... Thanks !

Gary

 

 

[Rasputin]

My earnings forecast and #of diluted sh outstanding for the next 3 years

 

2016 $1.54  11.1 B shares

2017 $1.63  11 B shares

2018 $1.72  10.84 B shares

 

My dividend and share buyback forecast

 

Sep 2016-Jun 2017 $0.32/year + $4 B share buyback

Sep 2017-Jun 2018 $0.36/year + $6 B share buyback

Sep 2018-Jun 2019 $0.40/year + $8 B share buyback

 

Based on these forecast, I believe warrants exercise price will be $12.50 or lower, and the stock price will be $20 or higher.  Warrants value will be $7.50 and each warrants will convert to 0.375 shares when exercised. 

 

I regard current conversion ratio of $4.9/$15.4 or 0.318 as low (warrants are cheap). 

 

Warrants price is also comparable to Jan 2018 $13 call of $3.9 and Jan 2017 $13 call of $3.25 and additional $0.50 since exercise price will be $12.5. 

 

If dividend turns out to be higher than my forecast, exercise price will be lower than $12.5

 

By the end of 2018, tangible common equity should be around $185 billion or $17 per share.  So the downside, assuming the stock price is equal to tce, is $0.40/warrants or 8% while the upside assuming my conservative forecast is more than 50% in 3 years. 

 

 

 

 

[Sunrider]

You mean 1.375 shares?

 

My earnings forecast and #of diluted sh outstanding for the next 3 years

 

2016 $1.54  11.1 B shares

2017 $1.63  11 B shares

2018 $1.72  10.84 B shares

 

My dividend and share buyback forecast

 

Sep 2016-Jun 2017 $0.32/year + $4 B share buyback

Sep 2017-Jun 2018 $0.36/year + $6 B share buyback

Sep 2018-Jun 2019 $0.40/year + $8 B share buyback

 

Based on these forecast, I believe warrants exercise price will be $12.50 or lower, and the stock price will be $20 or higher.  Warrants value will be $7.50 and each warrants will convert to 0.375 shares when exercised. 

 

I regard current conversion ratio of $4.9/$15.4 or 0.318 as low (warrants are cheap). 

 

Warrants price is also comparable to Jan 2018 $13 call of $3.9 and Jan 2017 $13 call of $3.25 and additional $0.50 since exercise price will be $12.5. 

 

If dividend turns out to be higher than my forecast, exercise price will be lower than $12.5

 

By the end of 2018, tangible common equity should be around $185 billion or $17 per share.  So the downside, assuming the stock price is equal to tce, is $0.40/warrants or 8% while the upside assuming my conservative forecast is more than 50% in 3 years.

[Rasputin]

Hi Sunrider,

 

It's actually 0.375.

 

The warrants can only be exercised cashless.

 

So if the warrants price is $7.50 and the stock price is $20, when you exercise your warrants, you will turn in your warrant, and for each warrant you turn in, Bank of America will issue 0.375 shares (0.375 times $20 is $7.50) to you. 

 

I also like WFC warrants.  Added to the warrants I bought in 2010.

 

I don't like JPM, dumped all my JPM and JPM warrants when I read Tarullo's insistence that gsib surcharge will be incorporated in 2017 stress test.  JPM has the least cushion and the highest surcharge, gonna be toughest for them. 

[Green King]

Hi Sunrider,

 

It's actually 0.375.

 

The warrants can only be exercised cashless.

 

So if the warrants price is $7.50 and the stock price is $20, when you exercise your warrants, you will turn in your warrant, and for each warrant you turn in, Bank of America will issue 0.375 shares (0.375 times $20 is $7.50) to you. 

 

I also like WFC warrants.  Added to the warrants I bought in 2010.

 

I don't like JPM, dumped all my JPM and JPM warrants when I read Tarullo's insistence that gsib surcharge will be incorporated in 2017 stress test.  JPM has the least cushion and the highest surcharge, gonna be toughest for them.

 

Can you tell me where does it say that it's a cashless exercise ? TIA and is it the same for wells Fargo warrant ?

[kranthi_vic]

Where can you purchase the BAC-WT warrants? Are they still available?

(Sorry, I`m new to this thread.)

[kranthi_vic]

Rasputin,

 

.375 shares does not make sense to me.

Current share price is -20$

Warrant Price is -7.50$

Strike price is x$

 

When you turn in the warrant shouldn`t you get ->  Warrent price/ (Warrant Price + Strike Price)  i.e.  7.5/(7.5+x)  number of shares?

Provided the current share price is higher then the Warrant price + Strike Price.

 

 

 

 

[gfp]

From the prospectus for the BAC class A tarp warrants -

"The exercise price of the warrants cannot be paid in cash and is payable only by netting out a number of shares of our common stock issuable upon exercise of the warrants equal to the value of the aggregate exercise price of the warrants. The number of shares of our common stock issuable upon exercise of the warrants will be calculated based on the closing price of our common stock on the exercise date. The warrants are currently exercisable and expire on January 16, 2019. See “Auction Process” in this prospectus supplement."

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

Wells warrants are the same -

http://www.sec.gov/Archives/edgar/data/72971/000119312510126208/d424b5.htm

 

Hi Sunrider,

 

It's actually 0.375.

 

The warrants can only be exercised cashless.

 

So if the warrants price is $7.50 and the stock price is $20, when you exercise your warrants, you will turn in your warrant, and for each warrant you turn in, Bank of America will issue 0.375 shares (0.375 times $20 is $7.50) to you. 

 

I also like WFC warrants.  Added to the warrants I bought in 2010.

 

I don't like JPM, dumped all my JPM and JPM warrants when I read Tarullo's insistence that gsib surcharge will be incorporated in 2017 stress test.  JPM has the least cushion and the highest surcharge, gonna be toughest for them.

 

Can you tell me where does it say that it's a cashless exercise ? TIA and is it the same for wells Fargo warrant ?

[Rasputin]

Hi kranthi,

 

Warrant price + strike price = current share price

 

Your formula is the same as mine :) 

 

For the warrant price to be $7.50 while share price is $20, strike price must be $12.50. 

 

Yes, you can still buy the warrants, though you maybe competing with me :)

 

ticker symbol will differ from broker to broker.  yahoo has it listed as bac-wta

[CorpRaider]

If memory serves, all the TARP warrants other than AIG, provide for cashless exercise.

[benchmark]

Bought more common @$14.98, hard to resist.

[Rasputin]

my gtc limit orders for A warrants at $4.50, $4.40, $4.30 were filled.

[fareastwarriors]

I picked up some warrants as well...

[karthikpm]

Is there not a significant margin of safety in the common compared to the warrants at this price?

[gary17]

if commons go below $13 the warrants would be worthless

[Rasputin]

warrants will be worthless between now and jan 16 2019 only if the common never goes above $12.50. 

 

by the end of this year the exercise price will be less than $13 assuming dividend increase to $0.08/quarter starting Sep 2016. 

 

if between now and jan 16 2019, the stock price goes above $19, warrants are better than holding common stocks. 

 

Between Q318-Q219, my conservative estimate shows BAC will return over $12 B (div+sh buyback), assuming no change in interest rate. 

[OracleofCarolina]

bought some on Monday and Tuesday....right now getting schlonged...premature accumulation