BAC-WT - Bank of America Warrants

[John Hjorth]

FED CCAR 2018 Announcement is now up.

 

The url to the pdf-file does not work yet.

[Viking]

BAC CCAR numbers are out. They came in at expectations of $26 billion total. The dividend is increasing by 25% which I think is light; $0.15 dividend = 2.1% yield (with shares at $29). I think he is going heavy on the buyback for one more year to offset the dilution from the warrants that is coming later this year and early in 2019. Moynihan continues to manage BAC in a very conservative way; slow and steady :-)

 

“Bank of America today announced that the Federal Reserve did not object to the company’s capital plan, which is estimated to return approximately $26 billion to common stockholders over the next four quarters through a quarterly common stock dividend increase and common stock repurchases. That estimate is based upon the company’s current number of outstanding shares and share price.

 

As part of the capital plan, the company’s Board of Directors plans to increase its quarterly common stock dividend by 25 percent to $0.15 per share, beginning in the third quarter of 2018.

 

Also, the company has been authorized to repurchase approximately $20.6 billion in common stock from July 1, 2018 through June 30, 2019, which includes approximately $0.6 billion in repurchases to offset shares awarded under equity-based compensation plans during the same period.”

[Valuehalla]

Viking, thx for comments,.. you expect 26B are 12 month earnings of BAC.

 

Do you have an estimation for 12 months earnings of WFC ?

[racemize]

Viking, thx for comments,.. you expect 26B are 12 month earnings of BAC.

 

Do you have an estimation for 12 months earnings of WFC ?

 

I'm not Viking, but I have them around $22 billion.

[Viking]

I use RBC for my estimates. They estimate WFC will earn $21.7 billion in 2018 and $23.5 in 2019. Total capital return for WFC will be about $32 billion. Wow! EPS estimates will be going up for WFC as share buyback amount is much larger than estimates. WFC clearly leaned out with their ask and award and the stock is popping today.

 

I am surprised with the BAC award in two ways:

1.) dividend increase of 25% to $0.15 is a surprise. Moynihan repeatedly said he supported a 30% dividend payout ratio. BAC will earn $2.55 in 2018 so I think it reasonable to assume 30% of $2.55 = $0.76/ share per year = $0.19/share/quarter. They will likely earn close to $3 in 2019 so when you look at the 4 CCAR quarters (Q3 2018 to Q2 2019) they will earn about $2.75/share so $0.60 dividend = 22% payout ratio. RBC was estimating $0.22 so clearly there was some mis communication with the analyst community going on.

2.) total payout of $26 billion was slightly below what most analaysts were expecting. Again, Moynihan was very vocal in stating that BAC has about $15 billion in excess capital that will need to be returned to shareholders (as BAC would not need it to fund growth). RBC estimated BAC will earn about $25 billion in 2018 and $27.5 billion in 2019. With a $26 billion total award BAC will not be returning and excess capital over the next CCAR year (unless they get a top up award similar to last year). With their large award, WFC showed what was possible for BAC.

 

Bottom line, small dividend increase of 25% and ok total award of $26 billion has underwhelmed shareholders. I hope Moynihan explains why the dividend increase did not take the payout ratio closer to 30% and why they did not ask for a larger award to get some excess capital to shareholders.

[Valuehalla]

THX a lot, you gave a clear and simple overview on the situation. In comparison to WFC, the redemtion from BAC looks poor.

[Viking]

Valuehalla, it shows you how far BAC has come that we are disappointed with $26 billion in capital return.

 

My guess is Moynihan is wanting to demonstrate that he is running BAC in a very risk averse way. Last year they were approved to return $16 billion; this amount was increased by $5 billion in Q4 so they will return $21 billion total. This years award was $5 billion more. Perhaps Moynihan wants to keep room for nice large increase next year as well. My guess is he is going to take some heat for being so cautious this year.

 

BAC may also feel the shares are still cheap so they want to go heavy on the buybacks while this is still the case. Of the $26 billion, about $6 billion will go to pay the dividend so that will leave about $20 billion for the buyback. With the shares currently trading at $28.50 this will allow BAC to retire 700 million shares or about 7% of shares outstanding. As I have mentioned before BAC has warrants that will convert to shares later this year early next year (this is the last of the warrants) so Moynihan may want to go heavy on the buybacks this CCAR cycle.

 

Bottom line is shareholders will see about 9% return of capital (2% dividend and 7% share repurchase) which is solid. More importantly, BAC will continue to grow its business and total earnings so patient investors should do quite well over the next couple of years.

[gary17]

In comparison WFC is returning about 12% -

[John Hjorth]

Bloomberg [June 29^th 2018]: Forget Banks and Worry About High Stock Prices.

 

I honestly find this hilarious! - Why not just buy some bank stocks instead? Personally, I'm really stunned by the market reaction for the big four US banks today on the CCAR Announcements from them yesterday. They are really in the doghouse - still.

[MVP444300]

With the recent price drop in the warrant from $21 to $16 per share and being so close to expiration I'm kicking myself for not converting to common stock.

 

Any recommendations on whether to hold until expiration to convert to common or go ahead and do it now?

[Valuehalla]

I have a much larger position of BAC, than of WFC. I love both as my bank-stocks in my portfolio.

 

And after thinking about the situation and the great comments of Viking, I feel comfortable with that.

 

Regarding the expected earnings for 2019 of 27,5 B for BAC and 23,5 B for WFC I think the marketcap of BAC shall bei 15 to 19 % above WFC. If it is true that BAC is growing earnings more fast than WFC in the future, the difference shall be even higher than app 17 %.

 

That is not the case now: Now MarketCap of BAC is just 6 % over WFC. So this means to me, the price of BAC shall increase faster than WFC.

 

The fact that WFC is now returning 12 % (32B of 261,3B) to us as shareholders and BAC just 9 % (26B of 290,5B) is irrelevant for me. The valuation of BAC shall be clearly above WFC.

 

 

[rkbabang]

With the recent price drop in the warrant from $21 to $16 per share and being so close to expiration I'm kicking myself for not converting to common stock.

 

Any recommendations on whether to hold until expiration to convert to common or go ahead and do it now?

 

I have the same regret. I have one question, If these are held until expiry do they convert automatically or do you need to call your broker?

[stahleyp]

For taxes on the warrant, I was under the impression that if you convert, no taxes are due until you sell the common. I found this and now not so sure:

 

https://finance.zacks.com/taxation-stock-warrants-7458.html

 

"The difference between the strike price and the price of a share, minus the cost basis, is taxable income. Suppose you exercise warrants with a strike price of $30 per share to buy 100 shares of XY Company and you originally paid $500 for the warrants. Your total investment is thus $3,500. If the market price on the day of exercise is $50, the stock is worth $5,000 and the difference is $1,500. This $1,500 is taxable as ordinary income in the year of exercise. It is not a capital gain because you did not own the shares prior to exercising the warrants."

 

anyone know how these are taxed? Thanks!

[Viking]

I have a much larger position of BAC, than of WFC. I love both as my bank-stocks in my portfolio.

 

And after thinking about the situation and the great comments of Viking, I feel comfortable with that.

 

Regarding the expected earnings for 2019 of 27,5 B for BAC and 23,5 B for WFC I think the marketcap of BAC shall bei 15 to 19 % above WFC. If it is true that BAC is growing earnings more fast than WFC in the future, the difference shall be even higher than app 17 %.

 

That is not the case now: Now MarketCap of BAC is just 6 % over WFC. So this means to me, the price of BAC shall increase faster than WFC.

 

The fact that WFC is now returning 12 % (32B of 261,3B) to us as shareholders and BAC just 9 % (26B of 290,5B) is irrelevant for me. The valuation of BAC shall be clearly above WFC.

 

Valuehalla, it really is interesting to look at EPS growth for BAC going back 3 years and then 2018 and 2019 estimates. Amazing turnaround. Compare EPS growth (and estimates) at WFC over the same 5 year period. BAC has clearly outperformed and its share price has as well.

 

However, I wonder if WFC stock is not looking a little like a coiled spring. I believe WFC is currently incurring large one time costs to remedy sales practice scandal etc. These costs should start to roll off in 2020 and when they do we may see EPS at WFC start to take off. I do have a small position in WFC as I view it as a solid long term holding. BAC continues to be my largest holding. C is now my second largest position.

[indirect]

Tax on warrants

 

I am not sure. I will post couple of opinions

 

https://www.strictlybusinesslawblog.com/2012/11/02/stock-options-versus-stock-warrants-whats-the-difference/

 

http://ww2.cfo.com/accounting-tax/2009/02/lets-be-clear-there-is-a-tarp-tax-exception/

 

https://www.irs.gov/pub/irs-drop/n-09-14.pdf

[treasurehunt]

Tax on warrants

 

I am not sure. I will post couple of opinions

 

https://www.strictlybusinesslawblog.com/2012/11/02/stock-options-versus-stock-warrants-whats-the-difference/

 

http://ww2.cfo.com/accounting-tax/2009/02/lets-be-clear-there-is-a-tarp-tax-exception/

 

https://www.irs.gov/pub/irs-drop/n-09-14.pdf

 

Thanks for these links, indirect. I was considering exercising my remaining WFC TARP warrants close to the expiry date, but now I think I am better off selling them (long-term capital gains tax rate versus marginal income tax rate; my cost basis in the warrants is just over $8 per warrant). The information you provided here seems quite definitive. Why are you still unsure about the tax treatment?

[indirect]

If IRS considers TARP warrants as options then,

 

https://www.marketwatch.com/story/how-stock-options-are-taxed-2015-03-18

 

 

[treasurehunt]

If IRS considers TARP warrants as options then,

 

https://www.marketwatch.com/story/how-stock-options-are-taxed-2015-03-18

 

Ok. I guess taxation at exercise applies only to employee stock options, not to regular call options. So if warrants are treated as options, warrant exercise is not a taxable event? I'll go back to my plan to exercise and not sell. Should have just bought the damn things in an IRA.  :)

[racemize]

If IRS considers TARP warrants as options then,

 

https://www.marketwatch.com/story/how-stock-options-are-taxed-2015-03-18

 

Ok. I guess taxation at exercise applies only to employee stock options, not to regular call options. So if warrants are treated as options, warrant exercise is not a taxable event? I'll go back to my plan to exercise and not sell. Should have just bought the damn things in an IRA.  :)

 

This is how I've understood it.

[MVP444300]

I use Fidelity as one of the brokers I use.  When I asked them what the process would be to convert my A Warrants to common stock they said the strike price would be $12.66 which I agree with totally but that the number of commons that I will be able to convert would be far less than the # of warrants I have.... about 40% less.  In other words if I bought 10 shares of warrants i would only be able to convert 6 shares at a strike price of $12.66.  Fidelity said that Computershare would be handling the conversion and that they would be charging a fee that would take the 40% 

 

I thought for every warrant you buy it would entitle you to 1 share of common (maybe a little more with the reduction in strike price).  If I bought 10 warrants that would entitle me to buy 10 commons at the $12.66 strike price.

 

Anyone else having this issue converting or have any advice?   

[gfp]

I don't have any advice but I think it's important to note whether you do, in fact, have such a small position in the warrants that the expenses of converting are 40%.  For instance, was 10 warrants an example or your position size?

[lschmidt]

Fidelity is correct. B of A warrants can only be converted via cashless exercise. This means that for every share of BAC common you receive, you give up one warrant and $12.66 cash for the strike price. Simply take the total value of the warrants, divide by the market price of BAC common, and that's how many BAC common shares you should receive as an equivalent.  60% common to warrant ratio sounds about right. Fidelity should charge no fee, the 40% is the strike price.

[MVP444300]

I don't have any advice but I think it's important to note whether you do, in fact, have such a small position in the warrants that the expenses of converting are 40%.  For instance, was 10 warrants an example or your position size?

 

My position is much larger than 10 shares.  lol  I was giving an example of what my broker was telling me.  I got it resolved though.  Thank you

[MVP444300]

Fidelity is correct. B of A warrants can only be converted via cashless exercise. This means that for every share of BAC common you receive, you give up one warrant and $12.66 cash for the strike price. Simply take the total value of the warrants, divide by the market price of BAC common, and that's how many BAC common shares you should receive as an equivalent.  60% common to warrant ratio sounds about right. Fidelity should charge no fee, the 40% is the strike price.

 

I'm an idiot!  This is my first time dealing with warrants, or any option for that matter, so I didn't quite understand what the broker was telling me when he said conversion from warrants to common would be about 40% less warrants ie 10 warrants would give me 6 common shares.  I was expecting a 1 to 1 conversion. 

 

I got on IR with BAC who explained it to me and confirmed what you said above.  Thanks

[lschmidt]

No worries, I converted a few months ago with Fidelity as well. They calculated the conversion correctly, and the conversion took 2 days without any problems. Interestingly, a friend did the same with Wells Fargo - they did the calculation wrong by about 3%, requiring many angry calls to the brokerage desk.