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Dear Mr. Berko: In 2008, you recommended Bank of America’s 7.25 percent convertible preferred stock at $720 a share. It yielded 10 percent, and you said it was a safe investment. We bought 30 shares for $22,000, and they’re now worth $1,060 each, or $31,000. We have a nice $9,000 gain and get $1,087.50 in interest every six months from Bank of America. Our broker emailed us his recommendation to sell this preferred stock and buy 300 shares of Procter & Gamble plus 500 shares of Bank of America common stock. We called him to discuss this, but we ended up talking to his assistant. We’d appreciate your thoughts on this transaction and also on how to find the symbol for Bank of America’s convertible preferred stock on Yahoo.

T.Y.

Cleveland

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Dear T.Y.: That broker gave you good advice. However, I think those three transactions, which would generate more than $1,000 in commissions, are significant enough to warrant a personal telephone call. If this is a common occurrence, then I urge you to find another adviser because this guy may be smoking something in the back room while the assistant covers for him. Or move your account to one of the larger discount brokerages, where the commissions for these transactions won’t exceed $27. The New York Stock Exchange ticker symbol for the preferred is BAC.PRL; however, Yahoo’s backward system for preferreds is an enigma to most investors, including me!

Have you ever met someone for the first time and in 30 seconds decided that you don’t like him? Well, that’s the way I feel about Bank of America (BAC-$16.59). It’s strange to explain, but the shares feel like the taste of a copper penny on my tongue. Now for your information, I need to ask you a question. Do you know that the 6 million-share issue of Bank of America 7.25 percent convertible preferred stock matured last January at $1,000 per share – and if Bank of America redeemed them, you’d be out (30 times $60) $1,800? No shares have been redeemed yet; however, the 7.25 percent rate costs Bank of America $435 million in annual interest. So it would make good business sense for Bank of America to refinance this convertible at 4 percent and save $200 million annually in interest costs.

Bank of America, the Rodney Dangerfield of the banking industry, has been disparaged by investors because of its 2008 purchase of Countrywide Financial from Angelo “Big Tuna” Mozilo, whose friendships with and donations to the bigwigs in Congress kept him out of prison. The ensuing mortgage scandals and terribly costly litigation resulting from this purchase continue to hound Bank of America’s recovery. Still, with more than 5,200 offices in 29 states and more than $2 trillion in assets, Bank of America trades at 75 percent of its $22 book value, and management expects to report income of $1.30 a share this year. Though the dividend is likely to remain at 4 cents, the Street thinks Bank of America could trade in the low $20s in the next 24 months. Reuters, Standard & Poor’s, Morgan Stanley, State Street and Stifel Nicolaus agree.

I also like your broker’s recommendation of Procter & Gamble (PG-$80.18), an $85 billion branded-products company. It’s a stable “steady Eddie” stock that sits like a crown jewel in most long-term growth and income portfolios. Probably every home, every office and every commercial or industrial establishment uses a Procter & Gamble product. The $2.41 dividend, yielding 3 percent, has been raised for 40 consecutive years and may be increased to $2.60 if the company meets its 2014 earnings target of $4.36. The reason for Procter & Gamble’s enormous success is extra-capable management that strives to improve net profit margins. Last year, net profit margins were 14 percent; this year, management expects 14.6 percent while aiming for 17 percent by 2018.

A sneaky way Procter & Gamble keeps costs down is by reducing the content of its packaging. For example, the Ivory dish detergent bottle was downsized from 30 ounces to 28 ounces; however, the price remained the same. Also, Procter & Gamble raised the price of Pampers and Luvs and reduced the number of diapers in each package. Reductions such as those keep the government’s consumer price index from rising and translate into bigger profits for other companies – such as Coca-Cola, Kraft Foods, The Hershey Co., General Mills and Kimberly-Clark – that have reduced content in their packaging.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. © 2014 Creators.com