Bank Of America Sale Shows Dilution Doesn't Matter

Bank of America (BAC) shares are up about 1% to $11.34 pre-market despite its massive $13.5 billion stock sale priced at $10.77.

Investors weighing the news feel that to whatever extend they’ve been diluted, it’s counteracted by the inherent good news that they were able to raise so much money.

More generally, it’s not obvious why dilution — assuming the share sale is made somewhat near the market price — is a negative for stockholders. Sure, you own a smaller percentage of the company, and thus a smaller slice of future cash flows, but, to the extent that the value of a bank and its future earnings levels are predicated on its capital levels, it shouldn’t matter much.

Theoretically Bank of America should have more earnings power now, not to mention a greater likelihood of not going bust.

A share sale is just the mirror image of a stock buyback, though it has a deleveraging effect, rather than a leveraging one. Neither predicts higher or lower stock prices. And if you really feel that Bank of America is sitting on a pile of gem assets, and you don’t want to be delevered, you’re certainly allowed to buy more BAC on margin and achieve whatever leverage towards the bank’s assets as you wish.

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