8/19/08

Another Way to Buy BAC

If you are confident that Bank of America (BAC) won't go out of business, won't eliminate its dividend, and that its share price will eventually recover, you may want to consider buying its convertible preferred shares (BAC-PL) to wait out the storm.

Bank of America's convertible preferred (Series L) pays an annual dividend of $72.50 per share in quarterly installments. Series L's recent price is around $837 a share. That makes its yield over 8.6%. Unlike the majority of preferred stocks, which treat their payouts as interest payments, Series L pays a dividend eligible for the 15% tax rate for qualified dividends.

Each Series L share converts to 20 shares of common stock any time at the holder's option. See the prospectus for details.

Series L's 52 week low, which it made on 7/15/08, is $750.25. Its 52 week high, made in February 2008, is $1,168.

If you're considering buying BAC's common shares as they slump because you think BAC will survive and its dividend will not be eliminated, keep an eye on Series L. It may be the safer bet. First, you'll get a pretty good dividend that's safer than the common stock's. Some analysts expect BAC to lower its common share dividend before the credit crisis is over. Second, when (if) the common shares recover, you can convert to them.

If I were looking to buy Bank of America stock (I'm not, at least at current prices), I'd buy it through the preferred.

Things to Note

If you are interested, you must read the prospectus.

At Bank of America's option, the preferred stock can be bought back by the company for $1,000 a share on or after 1/30/13.

If BAC's board does not declare a dividend or fails to pay a dividend, holders of the preferred stock will not be entitled to a dividend that quarter. The preferred stock is non-cumulative. Any unpaid dividends will not accumulate, and won't be paid at a future date.

If the price of the common stock exceeds the conversion price by 130% on or after 1/30/13 for 20 of any 30 consecutive days, Bank of America can force the conversion of preferred stock into common stock.

Disclosure: I hold no positions in any securities mentioned above. A note on my recommendations is here.