So you guys like the divvy. Some of you are even relying on it for retirement.
OK, one question, can you add and substract?
Company pays ~8% in various forms to investors: makes loans at ~6%, which even if good, have a net of ~2% AT BEST!
Enlighten me, how does that add up?
Company has only 10,5 million stockholders. But, Company lends out $500,000,000 dollars at 6%. What Company lends it borrows from the US Government for 1% or more less than it charges borrowers. You cannot equate the number of stockholders with the amount of money it is lending. They are not equal numbers. Therefore BAC makes a profit even after paying 8% to stockholders because it is making money on much greater dollars it lends. The volume that it lends far exceeds the number of stockholders and that creates overall profits for BAC even after paying dividends.
I think I understand your concern. Let's use this opportunity to review Finance 301. Follow me with this, I hope I can help you my friend.
It's the Annual Cash Flow statement. Look below at the "Cash Flow used in Financin Activities"
Under Dividends you will see how much BAC is paying to investors as dividends. You see it increases around 10% per year.
In 2005: 7.6 B Avg Mkt Cap: 186B Avg Yield:4,07%
In 2006: 9.6 B Avg Mkt Cap: 195B Avg Yield:4,90%
In 2007: 10.8 B Avg Mkt Cap: 213B Avg Yield:5,09%
In 2008: 10.0?? Avg Mkt Cap: 130B? Avg Yield:7,06%
When you divide the average market cap of during the year by the total $$ paid as dividends you will get the yield. However my friend, as you may know, the company doesn't have control over the market cap. This is the price tag the market, you and me, Buffet and everybody else on this board, puts on this company. BAC doesn't control this number. You may ask yourself now, "well yes, I understand that my new friend, but look at the net income during the Q1 2008??? They are actually paying more in dividends that what they are earning??? How on earth?" Well, while you make your point clear, let me tell you dear Friend, that BAC can perfectly pay Divedends>Income, at least in the short term. They have Cash for that. This happends with other companies too, like Frontline. Someone else in this board will tell you later more details on this. For now, I must go and leave you with this humble lesson.
Apples & Oranges!
There are banks that make loans, sell them (or at least they used to), and profit from the transaction. Then there are banks that make loans and keep them as an asset on their books.
And you DO get the fact that the default rate on both mortgages and credit cards will exceed 20% for quite some time, DON'T YOU?
Along with the fact that thoses mortgages are secured by assets worth on average about HALF the face value of the loan outstanding, before you even factor in legal costs to foreclose and auction? You'll be under $20 in NO TIME.
If BAC had a wit in their craw they would WALK from CFC, but instead they will probably bid on WM and WB also.