Earlier this month, Bank of America issued a brand new series of preferred stock. Its Series W non-cumulative preferred pays quarterly distributions of $0.4140625 in March, June, September, and December. Based on its $25 liquidation preference, the annual dividend yield is 6.625%. Additionally, dividends are eligible for preferential tax rates applicable to “qualified dividend income.” Moreover, subject to approval by the Federal Reserve Board, shares are callable at $25 per share, in whole or in part, on or after September 9, 2019. Other details can be found in the prospectus supplement.
Typically, when I present details of fixed income securities offered by corporations, I include a bit of background information on the company. Given Bank of America is one of the world’s largest and best known banks, I will take a different approach with this commentary. When deciding whether to purchase the Series W preferred at its recent level of $24.84 (yield of 6.67%), I think the following two things should be near the top of one’s thought process:
- Ask yourself the question, “Do I believe there is a realistic chance that in the future Bank of America’s common stock goes to $0?” If you believe the bottom of BofA’s capital structure could one day be at risk, then the preferred stock might also be on the hook for a haircut. As a systemically important financial institution, a Bank of America failure would have catastrophic consequences for the American and world economies. Should the institution’s finances deteriorate to the point that a bail out would be necessary, the question preferred stockholders would want answered is the extent to which portions of the capital structure would play a role in the bailout. Until we see another preeminent global bank find itself on the brink of collapse, it’s hard to know how the authorities will react. The next time around, instead of bailing out shareholders, it’s possible that common and preferred stockholders get wiped out. Each of us will have to make up our own minds as to (1) the future likelihood of Bank of America experiencing financial strains great enough to put the company in jeopardy, and (2) our opinion about how the relevant authorities will react in that scenario.
- The Series W preferred is perpetual, which means it has no maturity date. Therefore, its pricing characteristics are similar to a long-term bond. If you believe we are on the verge of a new era of higher interest rates, you will want to consider the consequences of potential price declines in the Series W preferred. If your reason for purchasing this preferred stock is solely the income, and you plan to hold the stock your entire life (or until it is called), where we are in the interest rate cycle becomes less of a concern. Instead, a more important concern is whether the recent 6.67% yield is sufficient to meet your income needs. If, on the other hand, you want to leave open the possibility of liquidating your position in the future, then mark-to-market changes in the price of the Series W preferred become more important. Under that scenario, potential changes in interest rates should carry more weight in your decision-making process.
Investors interested in Bank of America’s Series W preferred stock can find it trading under the symbol BAC PrW or a similar iteration thereof (BAC-PW, BAC/PW, etc.).
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