Bank of America Preferred Shares (BAC.PR.P) – Potential Upside and Stability
Bank of America’s 4.125% fixed-rate series PP preferred shares (NYSE:BAC.PR.P) have shown promising performance in 2024 alongside the iShares Preferred and Income Securities ETF (PFF), delivering a total return of approximately 6%. The potential for these preferred shares to outperform is highlighted in the context of potential monetary policy easing by the Federal Reserve and the possibility of a US recession. Analysts estimate that the series PP shares offer an attractive 11% annualized return potential, with a year-end 2026 target price of $21.2 per share.
Company Overview
Bank of America operates across four main business segments: Consumer Banking, Global Wealth & Investment Management, Global Banking, and Global Markets. These segments collectively contribute to the bank’s overall performance and financial results. In the second quarter of 2024, Bank of America demonstrated strong financial performance, with robust revenues and earnings across its various business divisions.
Preferred Coverage Metrics
In the second quarter of 2024, Bank of America demonstrated solid financial health by paying $315 million in cumulative preferred dividends, showing strong coverage by net income. Additionally, the bank’s cumulative preferred shares outstanding were well covered by tangible shareholders’ equity, providing a substantial margin of safety. These coverage metrics indicate a level of stability and security for investors considering Bank of America’s preferred shares.
Capital Position
Bank of America ended the second quarter of 2024 with a standardized Common Equity Tier 1 (CET1) capital ratio of 11.9%, meeting regulatory requirements. However, there is a need for the bank to focus on strengthening its capital position to address potential risks and uncertainties in the market. Building up capital reserves will enhance Bank of America’s resilience and ability to navigate challenging economic conditions.
The Case for Series PP Preferred Shares
The Series PP preferred shares have historically underperformed compared to Bank of America’s common stock, primarily due to the impact of Federal Reserve rate hikes. However, with the potential for future rate cuts by the Fed, the Series PP shares may see a recovery in their price and deliver capital gains for investors. The current dividend yield of 5.5% for the Series PP shares presents an attractive starting point, coupled with strong coverage metrics by net income and common equity.
Outlook for Macroeconomic Indicators
The Federal Reserve’s projections for interest rates and economic growth play a significant role in shaping the performance of preferred shares like the Series PP. With forecasts indicating potential rate cuts and economic adjustments, there is room for the Series PP shares to regain lost ground and offer investors a path to capital appreciation.
Risks and Considerations
While Bank of America has demonstrated strong coverage and financial stability, there are risks associated with its performance, particularly in stress test scenarios. The bank’s capital position and ability to weather economic downturns are key factors to monitor for investors considering preferred shares. Additionally, the dynamic relationship between Fed rate changes and the price of preferred shares introduces a level of uncertainty that investors should be aware of.
Conclusion
Bank of America’s Series PP preferred shares present an opportunity for investors seeking exposure to the banking sector with potential for capital gains and stability. With a focus on strengthening the bank’s capital position and the potential for favorable economic conditions, the Series PP shares offer a compelling investment opportunity. As investors assess their portfolio strategies, considering preferred shares like the Series PP within the broader context of market dynamics and economic outlook can provide a balanced approach to wealth management and financial planning.
