Author: Felix Tong
Covestor model: Long Term Core Holdings
Disclosure: Long BAC-PU
The volatility in August presented the Long Term Core Holding Portfolio the opportunity to accumulate at lower prices stock of companies already held in the portfolio. Unfortunately, this also caused the portfolio’s cash position to dwindle. In my excitement to establish the Long Term Holding Portfolio early on, I believe I was overly aggressive in my initial purchases. This caused the additional burden of subsequent purchases needing to be sufficiently large so as to effectively dollar cost average down.
The current (9/12) effect on the portfolio is that little cash remains. While I lament the lack of dry powder in the portfolio, I am excited at the valuations I was able to get for current holdings. In the future, subscribers can expect when I initiate a position that it will be smaller than the 10% opening positions I established early on. This will leave more flexibility for me if prices decline.
One new holding I wish to discuss this month is BAC Capital Trust IV, 5 7/8% Capital Securities (NYSE: BAC-PU). This is a Trust Preferred Security for Bank of America. The month of August was a difficult one for Bank of America, culminating with an investment in preferred shares by Warren Buffett, and the sale of a portion of China Construction Bank. (“Buffett Invests $5 Billion in Bank of America, Ben Protess and Susanne Craig, New York Times, 8/25/11 http://dealbook.nytimes.com/2011/08/25/buffett-to-invest-5-billion-in-bank-of-america ; “Bank of America Sells Stake in China Construction Bank” Ben Protess, New York Times, 8/29/11 http://dealbook.nytimes.com/2011/08/29/bank-of-america-sells-stake-in-china-construction-bank/).
Though I am not currently interested in purchasing BAC common stock, the trust preferred securities present an interesting opportunity. With the passage of Dodd-Frank, the trust preferred securities will be phased out as tier 1 capital starting in 2013 and ending in early 2015. This information can be found in Sec 171 of Dodd-Frank. The complete text can be found here: https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf Note this is a very long document with difficult legal language. There are several summaries online, such as this from Mayer Brown: http://www.mayerbrown.com/dodd_frank_act/article.asp?id=9319&nid=13007
Tier 1 capital is the core measure of banks’ financial strength by regulators. Since these shares will no longer count as Tier 1 capital, I expect Bank of America to redeem the shares for par before 2015. The par of these shares is $25, and it currently (as of 9/12) trades in the low $20s. As an investor in these shares, I expect to receive a $0.367/share dividend every quarter and then $25/share when the shares are redeemed.
The source of my information on par and dividend for this security is the prospectus provided by Bank of America (.pdf file): http://media.corporate-ir.net/media_files/irol/71/71595/prospectus/BACCapitalTrust_IV_2.pdf
On Yahoo Finance, pricing information for the security is listed under ticker BAC-PU: https://finance.yahoo.com/quote/BAC-PU?ltr=1
