January 12, 2008

BofA Ownership Dilution

BofA buyout of Countrywide value can be debated on both sides of the coin. However as a shareholder I need to know the impact of the deal to my holdings. I believe the deal will be 3.47% dilution to my ownership.

BofA will issue .1822 of a share for each share of Countrywide. In addition it intends to issue another $2 Billion to boost capital. Any issuance of equity will dilute your ownership and you should expect the stock price to decline and I recon the decline is about 3.47% from pre-buyout price.

I have put the following table t show the effects of the stock issuance on BofA share price. Off course the analysis assumes all things are equal. I assume that BofA PE multiple will hold after te buyout however its Earnings Per Share (EPS) will be diluted as a result of share issuance.

BofAPre BuyoutCapital IssueCFC buyoutPost
# shares in Millions4,40150.6105.4394,557.04
Capital in Millions $$2,000$4,000
P/E8.48.4
EPS$4.7$4.54
Mkt Price$39.5$38.5
Projected Price$38.13
Dilution3.47%

I estimate that the price should decline to $38.13 to take into account the buyout. BofA declined to $38.5 on Friday but that can be attributed to weak market condition as the entire market declined by close to 2%. I do not think BofA price still reflect the dilution effect of the deal. So I will add to my position at $38 and under.

2 comments:

MG said...

Compared with the movement of the share price in the market, the dilution is pretty insignificant though.

I'll reiterate again, BAC is attractive here if they don't cut the dividend in August. I am really interested to see where the share price will land at the end of January (after earnings)

Sami said...

I hear what you saying and I agree. I think it is very attractive. I am buying half what I intended to buy at this level, hoping to pick the other half at a cheaper price.

I am also looking to bus USB. I read what you wrote about it and I think it is a good but here as well.