RSSBAC Over and Out!
By Jim Farrish | October 07, 2008 | 8:29 AM | 1 Comment
Wow – that took less time than I expected. Ken Lewis proved he was crazy taking such a big risk on Merrill Lynch (NYSE: MER). The announcement by Bank of America (NYSE: BAC) to cut their dividend in half and raise additional capital through a stock offering, shows the lack of concern for shareholders. The cut in dividend as stated by Lewis, “the dividend cut preserves $1.4 billion per quarter in much needed capital.” What is it needed for? To beef up the balance sheet. Why? Acquisitions that burned capital reserves in excess of what was already on their books.
The $10 billion to be raised through a stock offering will increase the outstanding shares by approximately 312 million. Add to that the dilution of the Merrill Lynch acquisition and you get 2.65 billion new shares to be issued. Let’s see cut the dividend in half to 32 cents and multiply it times the new shares outstanding and you get…$850 million. Now according to my math that is $550 million per quarter in saving and not the $1.4 billion Lewis is quoting. Maybe he could run for President. His numbers are almost as good as the two running.
If you review my previous posts on this topic, I stated the dividend would have to be cut 25-50%. Here we are and we haven’t made it to the acquisition of Merrill yet. I also stated, we didn’t know for sure other underlying issues/risks facing Bank of America. Yesterday we found out a little more. Higher write-offs for bad credit market investments and higher credit card charge-offs. He also stated, “these are the most difficult times for financial institutions that I have experienced in 39 years in banking.” Wow! Has he been living in denial the last 14 months.
To quote the famous General Grant, “if the horse dies, dismount.” For now the horse is dead and I have dismounted. As I stated in my last post on this, due to the rise in price I had raised my stop on half to $34.70 and the other half to $32.90. Both of those executed on the drop Monday. I am no longer a shareholder in Bank of America.
From my view, this mess may all work out over time, but now the risk is to high and the unknown too great. There are plenty of question marks still around the balance sheet and potential earnings of the bank. Credit cards write-offs are up and likely to continue. Mortgage and credit-related toxins on the balance sheet (Countrywide). $8.4 billion to settle the lawsuits over Countrywide selling practices to help 400,000 mortgage holders. Merrill Lynch acquisition and god knows what’s on that balance sheet. These are all factors that will be worked out in the coming months and years. For now I will watch from the sidelines as a analyst versus an investor.
As a side note, I continue to stress the importance of risk management. I continue to have a high cash position for this very reason. Until the uncertainty subsides why take the additional risk of guessing where the bottom is or what could happen next? If you want to gamble go to Vegas – the odds are better.
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