Dividends Are King - Bank of America (BAC)
Aug 24th, 2007 by Shaun Carter
Bank Of America (BAC) is the third stock I will be highlighting from the Dividends Are King blog series. Bank of America has been in the news lately for its $2 Billion investment in the beleaguered mortgage lender Countrywide Financial (CFC). BofA is a financial holdings company that operates in the United States as well as internationally.
That $2 Billion investment in Countrywide is seen as a bailout and came at a very high price for the mortgage lender, with BofA seeming to get the much better deal. The investment was for preferred non-voting shares with an interest rate of 7.25% with the option to convert them into common stock with a strike price of only $18/share. Countrywide traded at approximately $22/share at the time of the deal and if converted, BofA would own 18% of Countrywide and be the largest shareholder. Many are speculating this could be the first move toward a potential tender offer for the company, but I’m inclined to believe it is simply a very shrewd investment at a very favorable rate of return. This investment in Countrywide could prove to be very profitable for Bank of America, especially if the government comes through with any type of bailout for the mortgage industry. A bailout would make any mortgage play a lot less risky for all investors.
Banking has gone out of favor for some reason as people dump shares of financials for fear of the foreclosure mess, but it turns out Warren Buffet has taken a keen interest in the sector for the same reasons as I, he sees incredible value in an industry that was more severely punished than it deserved. I have picked up several banks at book value or very near and they have rebounded nicely in the last month. Berkshire Hathaway has been accumulating shares of BAC among others.
Currently BofA is trading with a P/E below 11, very attractive for a banking stock and is paying a very nice dividend of over 5% at the current price. The dividend alone is worth the investment as BofA has a habit of regularly notching up the amount paid to shareholders just like many of the other large cap financials out there. At the time of the original Dividends Are King post, Bank of America was trading at 49/share and is now 52 and climbing. Analysts have a mean price target set at 54, with a high around 65. I definitely see this stock more in the 60’s over the next 6 to 12 months, but the fallout from the subprime mortgage mess will no doubt adversely affect this stock in proportion to the situation in the mortgage marketplace.
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