First Look At 2 Bank of America Preferred Stocks (NYSE:BAC)

Introduction

Based on the read count and comments connected to my recent articles reviewing preferred stocks issued by banks, I searched for bank preferred stocks not covered yet. I found two issued by Bank of America (NYSE:BAC) that lacked covered on Seeking Alpha. They are:

• Bank of America Corporation 5% NCUM PFD LL (NYSE:BAC.PR.N)
• Bank of America Corporation 4.250% DP PFD QQ (NYSE:BAC.PR.Q)

I counted over a dozen preferred stocks that BAC has outstanding. While not covered here, before deciding to buy either of those reviewed here, comparing yields and YTCs with the others should be done as part of a complete due diligence process. Based on the yields offered by these preferred stocks compared to what other financial institution preferreds offer (see Analysis section), I rate these BAC preferreds as Strong Sell candidates. For those hoping to capture the YTCs offered, after examining the other BAC issues, I see these being Called as very unlikely.

Bank of America Corporation review

Understanding the Issuer is an important due diligence step when evaluating any preferred stock. After the debts are paid, will there be funds left to pay off the preferred stockholders if the firm files for bankruptcy? Seeking Alpha describes this bank as:

Bank of America Corporation, through its subsidiaries, provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. Its Consumer Banking segment offers traditional and money market savings accounts, certificates of deposit and IRAs, noninterest-and interest-bearing checking accounts, and investment accounts and products; and credit and debit cards, residential mortgages, and home equity loans, as well as direct and indirect loans, such as automotive, recreational vehicle, and consumer personal loans. The company’s Global Wealth & Investment Management segment offers investment management, brokerage, banking, and trust and retirement products and services; and wealth management solutions, as well as customized solutions, including specialty asset management services. The bank was founded in 1784 and is headquartered in North Carolina.

Source: seekingalpha.com /BAC

When looking at the Income statement EPS data, BAC has been treading water since 2018, with peak earning coming in 2021.

Looking at the Balance sheet, it shows the preferred stocks are well covered.

This helps explain the low yield the reviewed preferreds are currently offering investors.

Reviewing and comparing the preferred stocks

As with many income-oriented assets, prices bottomed in later October, rallying on the hope that rates have peaked. Unlike their floating rate cousins, rate cuts fully benefit fixed-rate issues.

Click to enlarge

Both are non-cumulative and subject to early Calls if they no longer count toward Tier 1 capital, which has happened to other preferreds. Both are eligible for the more favorable tax rate and are rated at the low-end of the investment-grade ratings system.

Analysis

• Both issues currently provide the same yield.
• Q’s lower coupon but same yield should benefit investors holding these assets in taxable accounts.
• N has the higher YTC, but it is short-lived and assumes the issue will be Called. BAC has several callable preferreds with high fixed coupons yet to be Called.
• Q provides longer Call protection, over two years’ worth.
• I think view these preferreds as “riskless” in terms of missing a dividend payment or being defaulted on. The damage to BAC would be too great.
• Recent reviews (links listed later) show investors can get over 6% from Huntington Bancshares (HBAN), 9+% from offerings from Citgroup (C).

Portfolio strategy

Financial institutions represent the vast majority of the preferred stocks available to investors. Feature variations, such as whether skipped dividends must be made up to fixed and numerous floating-rate formulas giving investors an array of options to consider. These and other features generate questions each investor needs to answer, such as:

• In theory, non-cumulative issues should have higher yields to compensate for that added risk. Is your risk analysis telling you it is worth taking the non-payment risk?
• Which direction are interest rates moving? Floating issues based on the 3-mo SOFR should outperform ones based on the 5-Yr UST rate when rates are climbing, the opposite otherwise, assuming reset dates are close.
• How much Call risk are you willing to accept? Two important factors here is the first Call date and the second is the coupon compared to current rates on similarly rated issues.
• Are you willing to trade some yield for greater Call protection? If rates are peaking, that becomes more important to consider.

Final thoughts

Here are some links to recent articles that generated high interest (pun intended):

• Huntington Bancshares, a Midwest regional bank
• Citigroup/Citibank, a major national bank with international exposure
• Goldman Sachs, a major investment banking firm

Preferred stocks issued by the above-mentioned Citigroup or JPMorgan Chase (JPM) would be similar to Bank of America preferred stocks and should be part of an investor’s due diligence universe of preferred stocks reviewed before deciding between the BAC issues covered here, if either.

Based on the yields offered by these preferred stocks compared to what other financial institution preferreds offer, I rate these BAC preferreds as Strong Sell candidates.