Tuesday, April 28, 2009

BAC & the Stress Test/BMY/AVY/BAC Preferred

Added 5/7/09: More discussion about Trust Preferred issues, including tax issues,  can be found in later and earlier posts which can be found with these links:

I am in a wait and watch mode for at least the next several days. breakingviews 

The preliminary results from the stress test reveal that Bank of America (BAC), the recent recipient of 45 billion dollars in government money, may need to raise additional capital.  WSJ.com   MarketWatchAlthough the pricing of BAC equity and trust preferred stock issues have improved over the recent weeks, the current yield on the typical Trust Preferred issue is still over 11%.  I would expect the price of those issues to fall some in response to this news, and the yield to rise.   Consequently, given the high yield that would have to be paid by BAC for the issuance of more preferred shares now, this does not appear to be an option for the bank.  I would regard the conversion of the equity preferred stock issued to the government to be dilutive and the worst option for existing shareholders.   If BAC is not able to convince the government of its error, or secure some latitude in the amount needed to shore up its capital base, then the only viable option would be to raise cash by selling assets, at least from the perspective of an existing shareholder.    BAC could raise funds by selling its stake in China Construction Bank, as an example. Article - WSJ.com  My exposure to BAC's preferred issues is extremely small, with just 50 shares of its floating rate equity preferred, BACPRE, and 50 shares of a Trust Preferred in Trust Certificate form, MJH, bought at $7.51. Buy of 50 MJH at $7.51/ Pop in My Animal Spirits Balloon/Japan/ Zulauf/CNBC/Meet the Press That later purchase has done well since my purchase in March.  My confidence in Ken Lewis evaporated last year, so I was not willing to risk much capital even in a Trust Preferred priced to yield almost 24% with a maturity in 2026 at a $25 par value.   Someone called that a wimp purchase and I would not disagree.  I have noted in the past that the maturity dates need to be checked on these issues. I am not likely to be alive in 2055 (the maturity date of BACPRCBAC Capital Trust XII Final Prospectus Supplement,) but I will probably make it to 2026.  Capturing the spread between par value and my cost is an important factor to me in making this kind of purchase. Readers of this post know that I will calculate my additional annualized return by amortizing the spread between my cost and par value, which would give me an additional  13.47%  annual return to 2026 based on my cost assuming BAC pays par value in 2026 (Dollar value of spread for  50 shares in 2026=$875 ($1,250 par value for 50 minus cost of $375) divided for the sake of simplicity by 17 years to maturity=$51.47 annual amortized return at straight line divided by $375 cost=13.47%) 

I have not checked the maturity dates of all BAC Trust Preferred issues.  My experience with bank Trust Preferred issues is that many of them mature after 2040, so I exclude all of those from a possible purchase.  Also, BAC has acquired several banks that had issued Trust Preferred stocks and BAC now pays the interest on those.  Sometimes I have seen better pricing on those issues than the ones originally issued by BAC.  An example would be two Fleet Capital Trust issues maturing in 2032 and 2033 which I have not discussed in these posts.  FleetBoston was acquired by BAC a few years ago.   I noticed those securities falling to around $5 with a $25 par value a few weeks ago in early March and both have doubled since that time.  I have mentioned that the payments to a holder of a Trust Preferred are classified as interest taxable at the highest marginal rate.  BAC also has equity preferred issues.  One thing to remember is that institutions often dominate the trading in the large bank preferred stocks, and many of them receive no tax advantage from owning an equity preferred as opposed to a Trust Preferred.  The TP, as debt, even though unsecured junior debt, is senior to all forms of equity.

Bristol-Myers, a small position in the Roth, released an uninspiring earnings report this morning, with GAAP earnings per share at 32 cents which was flat compared to the year ago quarter.  Yahoo! Finance  Non-GAAP results were in line with estimates at 48 cents, up from 39 cents in the comparable period last year.  Sales rose 2.5%, hurt by the strength of the dollar.  Sales were up 8% excluding the impact of currency exchange. BMY reaffirmed guidance at $1.85 to $2.  Mead Johnson, BMY's new publicly traded subsidiary, had better than expected results.  Yahoo! Finance
Plavix had a 10% increase in sales and Ablify rose 38%.  When I look at the chart of sales for particular drugs in the earnings release, and remembering that Plavix will lose its patent protection in a few years, I am reminded why I do not own more shares.  BMY mentions the sales growth of two drugs, Sprycel and Orencia at 33% and 43% respectively, but the total sales of both of those drugs combined was 212 million while Plavix had 1.435 billion in sales.

Avery Denison (AVY), a recent addition, continues to experience difficulty with falling demand for its products, reporting a worse than expected earnings of just 11 cents a share ex-items.  Yahoo! Finance  My view on that one is that my purchase was at a favorable price for a long term hold.  But I made the decision at the time of purchase to hold it only if AVY does not cut the dividend.  I am just going to keep it simple.  Avery did recently declare its regular quarterly dividend of 41 cents a share.  The yield at my purchase price, as I recall, was somewhere over 8%. 


I thought that I would add a comment to this post.  Regular readers of this blog are aware that there was a coup d'etat here at the trading desk on March 3, 2009, with RB seizing control over the keyboard.  The reason for not buying 1000 shares of MJH at $7.51 had nothing to do with the amount of capital in the taxable accounts, but was due solely to the power of LB to impose restraints on the per se animal spirit even after the coup.  LB is far more powerful than RB. About 30 securities were bought by RB during its brief tenure at the controls.  RB used at the time a more pejorative word than wimp to describe LB's caution, and its words to describe the restraints have intensified in their undesirable nature since that time.  

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