Monday 2 April 2012

BAC Warrants - Dividend Adjusted Strike Price

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 ratio
PTPP
Dividend
Adj Strike Price
Enhanced Yield
2011
2.04%
27000
 $0.04
 $13.30
0%
2012
1.84%
30000
 $0.04
 $13.30
0%
2013
10%
35000
 $0.25
 $13.09
5%
2014
15%
40000
 $0.44
 $12.69
14%
2015
20%
50000
 $0.73
 $12.00
29%
2016
26%
53000
 $1.02
 $11.02
51%
2017
26%
56180
 $1.08
 $9.98
74%
2018
26%
59551
 $1.15
 $8.88
99%
 

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 $8.88 by the end of 2018. This would provide an enhance yield of almost 100%!

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! 

3 comments:

  1. Excellent article covering a unique opportunity that few know about.

    ReplyDelete
    Replies
    1. I should add I own both A and B BAC warrants. I wanted to mention as well that the AIG warrants
      have until January 2021 which gives it a couple more years than BAC. Great job guys

      Delete
  2. Go check out our portfolio; there is a reason why we have amassed a huge stake in AIG warrants. And, we have just posted an article on it, enjoy!

    ReplyDelete