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“…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 ratio | PTPP | Dividend | Adj Strike Price | Enhanced Yield | |
| 2011 | 2.04% | 27000 | $0.04 | $13.30 | 0% |
| 2012 | 1.84% | 30000 | $0.04 | $13.27 | 1% |
| 2013 | 10% | 35000 | $0.25 | $13.03 | 6% |
| 2014 | 15% | 40000 | $0.44 | $12.60 | 16% |
| 2015 | 20% | 50000 | $0.73 | $11.88 | 32% |
| 2016 | 26% | 53000 | $1.02 | $10.87 | 54% |
| 2017 | 26% | 56180 | $1.08 | $9.80 | 78% |
| 2018 | 26% | 59551 | $1.15 | $8.67 | 104% |
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!
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- 1 year ago
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