Introduction

Whereas I’m not an enormous fan of non-cumulative most popular shares, some points have options which might be sufficiently fascinating to contemplate including them to my portfolio anyway. In a previous article, I mentioned the “busted” most popular shares issued by Wells Fargo (WFC), and on this article, I’d prefer to have a more in-depth have a look at the popular shares Sequence L issued by Financial institution of America Company (NYSE:BAC). Not solely do I just like the 6.4% yield, I additionally assume these securities might be an excellent instrument to reap the benefits of potential fee cuts in 2024. Though Powell recently stated it’s too quickly to say when the coverage would possibly ease, I feel it’s honest to say charges usually tend to transfer down as a substitute of up.

The popular dividends are nonetheless protected primarily based on latest financials

Once I spend money on most popular shares, I clearly wish to make sur ethe firm can afford to make the popular dividends. And though the Financial institution of America is a family title, I solely is sensible to keep watch over the financial institution’s monetary efficiency to ensure I can nonetheless sleep effectively at night time.

In the course of the third quarter, Financial institution of America noticed its curiosity earnings improve as soon as once more, however as you possibly can think about, its curiosity bills elevated as effectively. The web curiosity earnings did improve in comparison with the third quarter of final yr because the financial institution reported a net interest income of $14.4B. And that’s a rise of roughly $600M in comparison with the third quarter of final yr.

Income Statement — Financial institution of America Investor Relations

The financial institution additionally reported a complete non-interest earnings of $10.8B and a non-interest expense of $15.8B leading to a internet non-interest expense of roughly $5B. This implies the pre-tax and pre mortgage loss provision earnings generated through the third quarter was roughly $9.3B. And as you possibly can see within the picture above, there was a $1.23B mortgage loss provision which implies the pre-tax earnings was $8.1B and the web earnings was $7.8B.

Financial institution of America wanted roughly $532M to cowl the popular dividend funds which implies the web earnings attributable to the frequent shareholders of Financial institution of America was roughly $7.27B or $0.91 per share.

The entire internet revenue within the first 9 months of the yr got here in at $23.4B and this contains roughly $3.3B in mortgage loss provisions. The financial institution wanted $1.34B to cowl the popular dividend funds which implies BAC wanted roughly 5.7% of its 9M 2023 internet earnings to cowl the popular dividends whereas that ratio elevated to six.8% within the third quarter. Or in different phrases, even when the mortgage loss provisions would quintuple to $6B per quarter, the financial institution would nonetheless make sufficient cash to cowl the popular dividends.

I’m additionally fairly glad with the evolution of the Widespread Fairness Tier 1 capital place of Financial institution of America Company. Because the picture under exhibits, the CET1 capital elevated from $176B to $194B previously 4 quarters which boosted the CET1 ratio from 11% to 11.9%. And that places the financial institution on a a lot stronger footing and positively is a extra comfy place to be in. Be aware, the “net income” proven under is the web earnings earlier than the popular dividend funds.

CET1 Ratio Evolution — Financial institution of America Investor Relations

I’m leaning in direction of shopping for the Sequence L Most well-liked shares

The Sequence L, buying and selling with (NYSE:BAC.PR.L) as ticker image, is a so-called “busted” most popular which can’t be known as by Financial institution of America. The proprietor of the popular shares has the choice to transform the shares into 20 frequent shares, and if the underlying shares are buying and selling at $65/share, Financial institution of America might pressure the conversion.

However because the frequent shares are buying and selling at simply over $30, the chance of a pressured conversion to occur within the subsequent few years may be very low. And even when that may occur, the house owners of the popular shares would obtain at the very least $1,300 in frequent shares (20 instances $65) of Financial institution of America would lead to an instantaneous 15% capital acquire primarily based on the present share worth of roughly $1125.

In the meantime, these most popular shares supply a 7.25% most popular dividend primarily based on the $1,000 principal worth of the safety. Which implies that on the present share worth of $1,125, this safety at present provides a yield of 6.40%. That’s positively not the best on the road however I like the truth that this most popular share can’t actually be known as and the chances to see the pressured conversion into frequent shares may be very low.

Funding thesis

Once I wrote the earlier article on Financial institution of America’s Sequence L most popular shares, I in the end determined to purchase the popular shares issued by Wells Fargo with similar characteristics. As I just lately acquired an honest amount of money influx from bond maturities, I’m seeking to redeploy these proceeds in new income-generating alternatives. And whereas I’m totally conscious the popular shares issued by Financial institution of America are non-cumulative, I’ll possible set up an preliminary lengthy place within the close to future. I feel the 6.4% yield is suitable, and if we are going to certainly see fee cuts in 2024, the value of those most popular shares will possible transfer up.

I at present don’t have any place however will possible set up a protracted place within the close to future.