Berko: Advice on Bank of America and Proctor & Gamble
Thursday, January 16, 2014 7:00 AM
Dear Mr. Berko:
In 2008, you recommended Bank of America Corp.’s 7.25 percent convertible preferred stock at $720 a share. It yielded 10 percent, and you said it was a safe investment. We bought 30 shares for $22,000, and they’re now worth $1,060 each, or $31,000. We have a nice $9,000 gain and get $1,087.50 in interest every six months from Bank of America. Our broker emailed us his recommendation to sell this preferred stock and buy 300 shares of Procter & Gamble Co. plus 500 shares of Bank of America common stock. We called him to discuss this, but we ended up talking to his assistant. We’d appreciate your thoughts on this transaction and also on how to find the symbol for Bank of America’s convertible preferred stock on Yahoo.
That broker gave you good advice. However, I think those three transactions, which would generate more than $1,000 in commissions, are significant enough to warrant a personal telephone call. If this is a common occurrence, then I urge you to find another adviser. Or move your account to one of the larger discount brokerages, where the commissions for these transactions won’t exceed $27. The New York Stock Exchange ticker symbol for the preferred is BAC.PRL; however, Yahoo’s backward system for preferreds is an enigma to most investors, including me!
Have you ever met someone for the first time and in 30 seconds decided that you don’t like him? Well, that’s the way I feel about Bank of America (BAC-$16.72). It’s strange to explain, but the shares feel like the taste of a copper penny on my tongue. Now for your information, I need to ask you a question. Do you know that the 6 million-share issue of BAC 7.25 percent convertible preferred stock matured last January at $1,000 per share – and if BAC redeemed them, you’d be out (30 times $60) $1,800? No shares have been redeemed yet; however, the 7.25 percent rate costs BAC $435 million in annual interest. So it would make good business sense for BAC to refinance this convertible at 4 percent and save $200 million annually in interest costs.
BAC, the Rodney Dangerfield of the banking industry, has been disparaged by investors because of its 2008 purchase of Countrywide Financial from Anthony “Big Tuna” Mozilo, whose friendships with and donations to the mullahs in Congress kept him out of prison. The ensuing mortgage scandals and terribly costly litigation resulting from this purchase continue to hound BAC’s recovery. Still, with more than 5,200 offices in 29 states and more than $2 trillion in assets, BAC trades at 75 percent of its $22 book value, and management expects to report income of $1.30 a share this year. Though the dividend is likely to remain at 4 cents, the Street thinks BAC could trade in the low $20s in the next 24 months. Reuters, Standard & Poor’s, Morgan Stanley, State Street and Stifel Nicolaus agree.
I also like your broker’s recommendation of Procter & Gamble (PG-$80.78), an $85 billion branded-products company, a stable “steady Eddie” stock that sits like a crown jewel in most long-term growth and income portfolios. Probably every home, every office and every commercial or industrial establishment uses a PG product. The $2.41 dividend, yielding 3 percent, has been raised for 40 consecutive years and may be increased to $2.60 if PG meets its 2014 earnings target of $4.36 per share. The reason for PG’s enormous success is extra-capable management that strives to improve net profit margins. Last year, net profit margins were 14 percent; this year, management expects 14.6 percent while aiming for 17 percent by 2018.
A sneaky way PG keeps costs down is by reducing the content of its packaging. For example, PG reduced its Ivory dish detergent from a 30-ounce bottle to 28 ounces while keeping the same price. But PG raised the price of Pampers and Luvs and reduced the number of diapers in each package. Reductions such as those keep the government’s Consumer Price Index from rising and translate into bigger profits for other companies – such as Coca-Cola, Kraft Foods, The Hershey Co., General Mills and Kimberly-Clark – that have reduced content in their packaging.
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