Bank of America’s Christmas Gift to Shareholders: A Broken Promise and Further Dilution

Bank of America Corp. (BAC) CEO Brian Moynihan ate his words as the Charlotte, N.C.-based bank once again resorted to non-investor-friendly measures to raise capital, despite saying the bank would not take such actions.

Angry investors knocked the company's stock to its new eye-popping 52-week low of $4.92 a share in late Monday afternoon trading, closing the day's session at $4.99, down 4.13 percent. Five years ago, Bank of America's stock was trading above $50, more than 10 times today's value.

The embattled Bank of America has been selling assets and cutting staff to reduce costs and comply with stricter international capital standards. Moynihan said in August that the bank would try to avoid solutions that devalue the stakes of current shareholders, as it had done following its bailouts in 2009.

"We simply could not continue on a course of diluting our shareholders to build capital," Moynihan assured investors during a conference call.

Yet, four months later, shareholders are left with a broken promise. Since the Aug. 10 conference call, the bank's stock has slipped another 34 percent.

Bank of America disclosed Friday it has sold 400 million common shares and issued $2.3 billion in debt to replace $5.8 billion of preferred shares, pushing the firm's total shares outstanding to a record high of 10.41 billion, a 126 percent jump from 4.49 billion shares outstanding five years ago, leaving shareholders with a fraction of their previous stake.

Tweaks in Bank of America's Earnings Filings

Bank of America removed the word "non-dilutive" in its third quarter earnings filing, while in its second quarter filing, the firm said it would "continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other non-dilutive capital related initiatives."

Bank of America was also quite confident when it said "we currently anticipate that we will be in excess of the minimum required ratios without needing to raise new equity capital," in its second quarter filing.

However, shortly afterwards, the bank happily accepted the $5 billion injection from Warrant Buffett, granting the billionaire warrants for 700 million shares, which may be converted to common shares and have an impact on current shareholders at a later date.

The assertion that the bank will be "in excess of the minimum required ratios" was eliminated in the third quarter filing.

Nickel and Dimed: History of Bank of America's Share Dilutions

Bank of America's outstanding share counts exploded after the most recent financial crisis.

Pre-recession, the bank actually spent $14.4 billion to buy back 291 million shares at an average price of $49.35 per share, when the bank brought in 40 percent more in revenues than it did in the prior year.

Moving into 2007, things began to deteriorate for Bank of America as profit (displayed as red bars in the graph) began to drop in the third quarter of 2007. The company still repurchased a total of 73 million shares at an average price of $51.42 per share.

Fourth quarter of 2008 saw Bank of America's profit move into negative territory. The bank started to issue stocks to help it weather the financial downturn, including a public stock offering of $9.9 billion, $4.2 billion in common stock offering to facilitate the Countrywide acquisition, and $15 billion issued to the U.S. Treasury under the TARP Capital Repurchase Program.

And the snowball kept rolling.

In the first quarter of 2009, Bank of America's shares outstanding increased 44 percent to 6.4 billion, from 4.44 billion in the same period a year ago. The bank issued 1.4 billion more shares in connection with its acquisition of Merrill Lynch. It also issued 1.3 billion shares of common stock at an average price of $10.77 per share to raise $13.5 billion for the bank. Through various other issuances, the company ended 2009 with 8.7 billion shares outstanding.

The rate of issuance increase slowed down as the company entered 2010. Meanwhile, we saw more bad news coming from earnings reports as the bank struggled to make a profit.

However, it seems that shareholders could be in for another round of meaningful dilution.

More Dilution Expected in 2012

In its filing Friday, Bank of America indicated that it "may, from time to time, engage in similar privately negotiated transactions involving the issuance of common stock, cash or other consideration ... in amounts that are not expected to be material," to the bank.

Analysts at Deutsche Bank AG (DB) have told clients to expect an additional $15 billion worth of common equity issuance in 2012 "to meet new capital requirements," reports TheStreet.com.

As of its latest quarterly filing, Bank of America is authorized to issue up to 12.8 billion common shares. The bank now has 10.14 billion common shares outstanding and could soon bump against the limit as the bank will likely want to issue more shares for compensation and other purposes.

If shareholders decide to approve an increase in the bank's overall share count, simple supply and demand mechanism will drive the company's stock price even lower and each share will be representing a smaller piece of the company's equity.

Citigroup So Far Has Kept Its Promise

Citigroup Inc. (C) Chief Financial Officer John Gerspach said in March 2010 that further dilution for the bank's shareholders should be limited. This promise came after huge capital raises in 2009 sent the bank's share count through the roof. By March 2010, the company had 28.5 billion common shares outstanding, while this figure was only at 5.5 billion in June 2009.

On March 2, 2009, Citigroup's stock slipped to $1.02 per share - the penny stock realm. The badly damaged firm's stock began falling from mid-2007 as it kept posting disappointing results. For the whole year of 2008, Citigroup remained in red, and ended the year by posting some $27 billion in losses.

The company's stock is currently trading at $24.79 a share, and the share count remains little changed from the 29 billion level.

Wells Fargo and JPMorgan

Wells Fargo & Co. (WFC) and JP Morgan Chase & Co. (JPM) joined Bank of America and Citigroup to repurchase its TARP preferred stock from the government by issuing new shares at the end of 2009. However, these two banks acted in a more investor-friendlier way and by comparison, have caused less dilution to shareholders.

Stock performance of Bank of America, Citigroup, Wells Fargo and JP Morgan over the past five years.