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BAC Warrants - Dividend Adjusted Strike Price

April 02, 2012 | About:
A reader of our blog posted the following:

“…I think you missed an important feature of the BAC warrants - they lower the exercise price for quarterly dividends in excess of a penny. This is huge…”

In our article, we have left out this portion as the prospective returns are already so high. But since it is mentioned, we shall explore this further.

A little background on the BAC Warrants A:

Unlike normal warrants, there is a clause in them that allows for any dividends paid that are above $0.01 to be subtracted from the strike price.

The table below shows the potential enhanced yield using conservative estimations on BAC’s PTPP and dividend payouts in the future.

Payout ratioPTPPDividendAdj Strike PriceEnhanced Yield
20112.04%27000 $0.04 $13.300%
20121.84%30000 $0.04 $13.271%
201310%35000 $0.25 $13.036%
201415%40000 $0.44 $12.6016%
201520%50000 $0.73 $11.8832%
201626%53000 $1.02 $10.8754%
201726%56180 $1.08 $9.8078%
201826%59551 $1.15 $8.67104%


We have decided to use adjusted PTPP instead of net income as in recent years, provisions have gone up quite significantly. As discussed in the previous article, the normalized PTPP would be in the range of $50B. Historical dividend payout has been about 26.5% of PTPP.

As shown in the table, the dividend payout of $0.04 in 2011 is only about 2.04% of BAC’s adjusted PTPP of 27000. In our calculations, we have assumed BAC’s historical dividend payout of 26.5% would only be restored in year 2016. And for their normalized PTPP of $50B, it would only be reached in year 2015 with subsequent years of CAGR 6%.

Using these estimations, the strike price would be adjusted lower from $13.30 to $8.67 by the end of 2018. This would provide an enhance yield of almost 104%!

The best part of these warrants is that they are long-dated compared to many other warrants out in the market. This would give BAC plenty of time to start paying out higher dividends.

Enjoy playing with the numbers and you will be amazed by how much more the enhanced yield could be!

About the author:

Valueground
We are a 2 partners team managing a concentrated portfolio, with the intention to hold our investments for as long as the fundamentals stay intact. We do not chase, nor wish to participate in the short-term race for returns, choosing instead for the best opportunities to invest in. The time we do so is the time we invest big, taking outsized stakes in what we call the “misguided & misunderstood” investments. Contrary to many, we subscribe to the notion of low risk, high return.

Visit Valueground's Website


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Comments

rijk40
Rijk40 premium member - 2 years ago
0.01 treshold is per quarter, not per year
equitynovice
Equitynovice - 2 years ago
"Unlike normal warrants, there is a clause in them that allows for any dividends paid that are above $0.01 to be subtracted from the strike price."

Not true. See "Adjustments to the Warrants" in the prospectus.
ramands123
Ramands123 - 2 years ago


@ Equitynovice : If the above calculation is not correct, can you please explain what the calculation should be. I was not able to understand the calculation on prospectus.
appooj
Appooj - 2 years ago
Francis Chou invested heavily in these warrants and wrote about them in his 2010 annual letter.
equitynovice
Equitynovice - 2 years ago
Basically, at the time of each dividend above .01, the higher the stock price, the smaller the downward adjustment of the strike price and vice-versa.
valueground
Valueground - 2 years ago
Rijk40:

The eventual enhanced yield would be 99% instead of 104%, does not make much difference. Thanks for pointing out.

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