No. of Recommendations: 3
For those who are looking for a preferred that has a long call protection and provides higher than treasuries, can consider WFC.PR.L.

The par is $1000 and quoting at $1538 and goes ex-dividend on 2/27 with 18.5 Quarterly dividend. The conversion price for this is $156.71 far away from current price of $45.

Alternatively, if you think the bank will survive and just be fine, you can buy the bank and get 4.5% dividend.
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The par is $1000 and quoting at $1538 and goes ex-dividend on 2/27 with 18.5 Quarterly dividend. The conversion price for this is $156.71 far away from current price of $45.

I already own WFC-L, although I purchased it at a much lower price. When it was at those lower prices, I recommended it, along with BAC-L, which I have also owned. (I actually arbitraged between these 2 for a while when there were some pricing discrepancies that seemed to go back and forth.) That said, I haven't been recommending either of these since they breached their conversion value of $1,300. While I agree that the WFC common increasing to ~3.5 times the current value to force a conversion of WFC-L is unlikely in the near future, it is possible if this is intended to be a long term holding. If a forced conversion happens, current buyers will have a capital loss.

The likelihood of BAC common just over doubling (from the current $31 to the conversion price of $65) is probably higher, and since BAC-L is priced above WFC-L ($1544 vs. $1538 on today's close) and WFC-L has a coupon rate of 7.5% vs. BAC-L's 7.25%, WFC-L is obviously the better buy of the two currently. But I'm not sure I would be buying either at these prices.

AJ
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You cannot do a forced conversion on WFC-L, in other words, management cannot force the conversion. The only way it can convert is due to share price appreciation. This is offered as an alternative to TLT or UST.
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You cannot do a forced conversion on WFC-L, in other words, management cannot force the conversion.

Sorry, that's not correct. Management can force it to convert. From the title page of the original Wachovia prospectus https://www.sec.gov/Archives/edgar/data/36995/00011931250808...

The Series L Preferred Stock is not redeemable by us at any time. On or after March 15, 2013, if the closing price of our common stock exceeds 130% of the conversion price for 20 trading days during any consecutive 30 trading day period, including the last day of such period, we may, at our option, cause some or all of the then outstanding Series L Preferred Stock to be automatically converted into our common stock at the then prevailing conversion rate.

And from page 15 of the 8-K that WFC filed on 12/30/08 https://www.sec.gov/Archives/edgar/data/72971/00008988220800... (when WFC acquired Wachovia):

(b) Mandatory Conversion at the Corporation’s Option.
(i) On or after March 15, 2013, the Corporation may, at its option, at any time or from time to time, cause some or all of the Series L Preferred Stock to be converted into shares of Common Stock at the Applicable Conversion Rate if, for 20 Trading Days during any period of 30 consecutive Trading Days, including the last Trading Day of such period, the Closing Price of the Common Stock exceeds 130% of the Applicable Conversion Price of the Series L Preferred Stock. The Corporation will provide Notice of Mandatory Conversion as set forth in Section 13(b)(iii) within three Trading Days after the end of the 30 consecutive Trading Day period.


It won't happen any time soon, but it is possible for busted convertibles to recover. And if this one does, and it is converted, there will be a capital loss for buyers at prices above $1300. As I said before, it's more likely that BAC will recover to a level where they can force a conversion of BAC-L, which makes WFC-L a better option at these prices, IMO. But buyers need to be aware that a forced conversion can happen.

AJ
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While I agree that the WFC common increasing to ~3.5 times the current value to force a conversion of WFC-L

Sorry, this should have read While I agree that the WFC common increasing to ~4.5 times the current value to force a conversion of WFC-L

It was late, and I forgot to adjust for the 130% requirement on WFC. That would mean that if WFC common reaches $203.72 (at current conditions - there are conditions for adjusting the conversion price downward in the prospectus), management could call a mandatory conversion for WFC-L.

The calculation on the possible BAC-L mandatory conversion at a common price of $65 is correct.

AJ
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AJ

You mentioned that management can force the conversation.... I have provided the following...

The only way it can convert is due to share price appreciation.

Again, the only way the conversion can happen is by the share price appreciation and management cannot force it at will.
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Again, the only way the conversion can happen is by the share price appreciation and management cannot force it at will.

Sorry, that means that there is a possibility for a forced conversion. Management can force conversion at will once the share price target is met.

That's different than what you said, which was: You cannot do a forced conversion on WFC-L, in other words, management cannot force the conversion.

And buyers at current price levels will suffer a capital loss if a forced conversion occurs.

WFC-L closed at $1535 today. If it takes 20 years for the share price target to be met (a CAGR of 7.9% from today's closing of $44.14), and a forced conversion to occur, the buyer will have captured 20 years of the $75 dividend, or $1500, but will suffer a capital loss of $235, since the 6.3814 shares of WFC common that they will get are only worth $1300 at the target prices of $203.723, for net cash realized of $1500 - $235 = $1265 That's a YTW of 4.12% if the conversion occurs in 20 years, as compared to the unadjusted yield of 4.88%, so it's a pretty significant drop.

Yes, that 4.12% is higher than the current TLT or UST yields. But what are the chances that TLT and UST yields will stay that low for the next 20 years? And what if the forced conversion occurs in just 10 or 15 years? That YTW drops into something starting with a 3 for both of those cases.

As I said, I already own WFC-L, but I bought it at a price where I will get a capital gain if the conversion is forced. Long term buyers at current premium prices need to be aware of the possibility for capital loss if conversion is forced. If you are recommending the stock, you should mention that possibility.

AJ
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A problem for me is that this preferred, like all bank preferreds, is not cumulative. I certainly do not expect them to ever miss a dividend, but it could happen, just as the forced conversion could happen.
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Today WFC-L closed at $1259.94, yielding 5.95% Since that's under the price of $1300 where a forced conversion could occur, I would be willing to buy at that price.

However, given that WFC common closed at $27.20 and currently pays $0.51/quarter ($2.04/year), yielding 7.5%, I'd probably buy the common at these prices. Considering that the WFC CCAR capital plan for Q3 2019 - Q2 2020 was to return about $9B to shareholders via dividends and $23B to shareholders via stock buybacks, I'd say that the chances of having to cut the common dividend are much lower than going into the 2008/2009 financial crisis, when they cut the dividend from $0.34/quarter to $0.05/quarter.

AJ
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