wfc-wt warrant

[shalab]

The strike price is $34 and Wells is arguably the best big bank in the U.S along with USB. The warrant is going for 8.50 as of Friday. With earnings of about $4/share in 2013 looks like the warrant can hit break-even by then.

 

At $51, one will have a double in the stock as well as the warrant. However, the stock will pay dividends and the warrant won't.

 

If one assumes $4 as the normalized earning power for WFC, over the next seven years, we will have 28 + 15 dollars in tangible book. Part of the earnings will be paid out as dividend - so commons are more attractive than the warrant in this case?

 

 

 

 

[txlaw]

Don't forget that the warrant strike price adjusts downward once dividends hit a certain level.

[indirect]

I expect WFC to earn $8-10/yr by the time warrant expires. So at expiration the return on the warrant will be higher than the stock.

[treasurehunt]

The strike price is $34 and Wells is arguably the best big bank in the U.S along with USB. The warrant is going for 8.50 as of Friday. With earnings of about $4/share in 2013 looks like the warrant can hit break-even by then.

 

At $51, one will have a double in the stock as well as the warrant. However, the stock will pay dividends and the warrant won't.

 

If one assumes $4 as the normalized earning power for WFC, over the next seven years, we will have 28 + 15 dollars in tangible book. Part of the earnings will be paid out as dividend - so commons are more attractive than the warrant in this case?

 

 

I own both the stock and the warrants, but I think the stock is a better deal right now unless you are very bullish on WFC's business over the next seven years.

 

The warrants only adjust downward for dividend payments that exceed $1.36 per year. Assuming that the dividend reaches this number by 2013, the stock will pay out about $9 of dividends till Oct 2018 that won't apply to the warrants.

 

I calculate that for the warrants to beat the stock, WFC has to be close to $60 by Oct 2018. Adding in the $9 of dividends, this works out to a return of 15% per year. The warrants are a better deal if WFC stock returns better than 15% per year. Why not play it safe and just buy the stock?

 

I am ignoring the possibility of the warrants spiking up in the interim for one reason or another.

[meiroy]

 

Could someone explain this? Thanks.

 

http://www.bloomberg.com/news/2011-09-01/wells-fargo-redeems-5-78-billion-of-securities-amid-new-rules.html

 

Wells Fargo & Co. (WFC), the fourth- largest U.S. bank, said it plans to redeem $5.78 billion of securities with cash on hand after new financial rules triggered a clause allowing the lender to repay the instruments.

 

“This action constitutes a redemption as a result of a ‘Capital Treatment Event’ under the securities’ governing instruments,” San Francisco-based Wells Fargo said today in a regulatory filing. “The company has determined that a capital treatment event occurred with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

[Nnejad]

Ya, basically I think post Dodd-Frank, certain securities (think of them kind of like preferred shares) no longer classified as equity, which means that banks can no longer include them when they present capital ratios to regulators. Because of this change in capital treatment, the value of these securities became less valuable to Wells, and it seems they had the foresight to include a buyback provision in case something like this should happen.

[meiroy]

Thanks Nnejad

 

[Uccmal]

Now, Can someone help me clear this up.  This would apply to certain preferreds and debentures but not the warrants.  The warrants were sold by the US treasury into the public markets as a way for the US government to recoup its investment.  The capital with Wells invountary 'blessing' went to the treasury.  So it is not relevant for Wells to redeem these particular securities except that it reduces stock dilution.  If these were converted all at once and Wells issued stock for them then the Core 1 capital ratio would actually increase as more paid in common stock would be put on the balance sheet. 

 

Am I out to lunch on this.  Feel free to tell me.  I hold 50 gs of these things and would like to keep them for their leverage effect going forward.

 

 

[Uccmal]

Funny, I was looking for the warrant prospectus, Googled it, and ended up back at an earlier thread on the board where someone had posted the link to the document. 

 

Anyway, Wells cannot force redemption.  They can however buy in the warrants, and self exercise, which would add to their core one capital through the issuance of shares.  Issuing common shares has the effect of revaluing the strike price on the warrants.  I expect the warrants are not the target of this campaign.  Should they be then the price would likely rise somewhat as they buy them in.  I am unwilling to sell mine so we shall see.

[Rabbitisrich]

Uccmal, self-exercise would be equivalent to cancellation. The strike price would just flow around and back to the balance sheet.

[Grenville]

Here's the list of trust preferreds that are being redeemed:

 

http://sec.gov/Archives/edgar/data/72971/000119312511239166/d8k.htm

 

If someone knows where in the prospectus the line about Capital Treatment event is for these specific securities, that would be helpful. I haven't looked, but it would help when cross referencing other securities.

[Kraven]

Here's the list of trust preferreds that are being redeemed:

 

http://sec.gov/Archives/edgar/data/72971/000119312511239166/d8k.htm

 

If someone knows where in the prospectus the line about Capital Treatment event is for these specific securities, that would be helpful. I haven't looked, but it would help when cross referencing other securities.

 

I don't know specifically in the prospectus for these specific securities it would be, but try searching for a term like "Special Event".  Typically in a trust preferred "Special Event" is defined as a tax event, an investment company event or a capital treatment event.  These are all things that allow an issuer to redeem the security early and usually without penalty.  Tax event is what it would seem to be.  An investment company event is one which would lead to possible need for registration of the vehicle under the Investment Company Act.  And a capital treatment event is one in which there is a change in law, regulation, etc. which causes a risk that the principal balance of the security will not be able to be treated as Tier 1 capital.  These terms are pretty standard across all trust preferred securities.

 

 

[merkhet]

This might be a little simplistic, but I'm looking at the warrants in the following way.

 

According to ValueLine's 10 year table, Wells has been able to compound book value at roughly 10% per annum.  So in 2018, their book value could be roughly 2x the current book of about $24.  Since Wells has historically been one of the better banks, it has been able to historically earn an ROA of about 2% and a ROE of 20%.

 

So, by 2018, Wells should be earning about $9.60 a share.  Slap a 10x multiple on that, and you've got a $96 share price.

 

With a strike of $34.01 (ignoring any dividends that might come down), you've got a warrant price of about $62, and you can buy a warrant for about $8 per warrant. @ 7.75 over 7 years, that's a 34% CAGR.

 

Alternatively, breakeven is $34.01 + $8 per warrant = $42.01.  In 2018, I figure it's unlikely that Wells Fargo trades below $42, so it's unlikely that you'd suffer a permanent loss of capital.

[Kiltacular]

merkhet,

 

I own these warrants.  I think you've nicely described the best case upside and highlighted the fact that there is little downside.

 

Stumpf has said they're targeting a 1.5 ROA (but that's probably a bit conservative).  To get a 20% ROE will be tough if the Basel III capital requirements go into effect, though it is doable IF they can get a 2.0% ROA.

 

I think the biggest upside in these big banks is the ever growing likelihood that the Basel III requirements for capital get toned down...if this happens, looks for it around 2015.

 

The European banks are not anywhere close to the capital levels they'll need and they've got enormous holes to fill before they even start getting to where US large banks are much less to where Basel III is targeting.

 

Jamie Dimon was questioning why the US banks should even be a party to Basel III.  This is what I've been looking for...this is the beginning of the turn in the capital requirements. 

 

Until the next election cycle has passed, the big US banks will be whipping boys.  After that, I think you'll start to see things point to capital requirements that allow for a 20% ROE on a 1.5% ROA...or about 7.5% max Basel III -- I think you'll see the SIFI buffer go away.

 

Then we're going to get to your price target -- that's what I'm expecting.

[meiroy]

 

What's the ticker for these warrants on Google Finance?

[meiroy]

 

What's the ticker for these warrants on Google Finance?

 

Well, according to WFC's IR it is not followed on Google Finance.