We start the new year with the disappearance of two household names in the financial world, Merrill Lynch which sold itself to Bank of America, (NYSE: BAC) fearing the worst of the broadly deteriorating financial markets; and Wachovia that not only feared the worst but lived through it only long enough to be acquired by Wells Fargo (NYSE: WFC). Both transactions completed yesterday while the market was closed.The market has been up all day and both BAC and WFC can be upbeat as two of the world's survivors of the 2008 minefields that blew up some of the largest and most revered names in many generations.
The BAC deal propels it to be the No. 1 financial institution in the United States with about $2.7 trillion in assets. Merrill Lynch ends a 94 year run. Earlier in the year BAC acquired Countrywide Financial. These two deals allow Bank of America to stand tall as he largest originator and servicing company for new loans, just when home refinancing may take off based on new lower rates becoming available. It may be able to expand financial services when the world is hoping for even a modest recovery.
BAC stock is on many prognosticators shopping list for 2009. It opened this morning at $13.92, far off its 52 week high of $45.08. Averaging its trailing and forward P/E you get about 10. I do this because I have such a hard time predicting the future. It also is trading near book value with a low P/S and a nice 4% yield.
Wells Fargo was one of my picks, see; Chasing Value: 9 picks for 2009 -- APC, GE, ISRG, WFC and more and pays an even more generous dividend of around 4.6%. It has not dropped as far as BAC, opening this morning at $29.48 down from its 52 week high of $44.69. I think WFC will have a much easier time integrating WB then what awaits BAC. It also has 10% less debt and better profit margins.
In the long run perhaps BAC has more room to outperform WFC and the market in general, having suffered greater losses. However, given the potential for unknown third and fourth shoes to drop ("the other shoe" dropped long ago) and surprise us all, I will take the higher yield and lower risk.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of WFC.
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