Don't buy common stock in banks, buy preferred stock or bonds
May 12, 2009
– Comments (9)
I had a quick thought this morning as I was making breakfast for my kids.
The earnings per share of banks are going to be a complete joke for a long time to come.
Think about it. Banks are diluting the he-two-sticks out of common shareholders right now by issuing new shares out the wazoo. So EPS would be lower than it in the past if things return to "normal" already.
Compounding this fact is that it turns out that the "normal" earnings that banks put up over the past several years weren't really normal at all. They used tons of leverage and other tricks and trinkets puff up their EPS.
Throw some terrible toxic assets, oops I mean "legacy" assets, into the mix.
Mix well.
And Ta Da, you have a recipe for terrible earnings per share for banks for years to come.
I have invested in banks during this crisis, but I did so using preferred stock and bonds. I own Goldman / JPMorgan Chase / B o f A / AmEx bonds and Wells Fargo / B of A / Goldman preferred stock. I have been making smaller bets and spreading them around. I'll be darned if I am going to watch the government piss away my tax dollars and not come a long for the ride.
The yields on these instruments are fantastic. Banks may not be able to make a lot of money per share for common shareholders in the future, but they are contractually obligated to continue to pay interest and dividends on the things that I own as long as they are in business (I know that simplifies things a little bit and they certainly aren't without risk, but you get the idea).
Owners of common stock grumble every time they get diluted with new share issuances, but as a preferred stock / bondholder every time I hear about one in a company that I am invested in I do a little dance.
That's all for now. I'm running late.
Deej
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