Bull Case For Fannie Mae Common Shares Depends On This

Many analysts argue that there is no bull case for Fannie Mae and Freddie Mac common shares. However, analyst Dick Bove offered one potential bull case for the government-sponsored enterprises, although he did so while also saying that he doesn’t think it is the most likely scenario.

The key to the Fannie Mae, Freddie Mac bull case

A big difference between the bull and bear cases for Fannie Mae and Freddie Mac is where they will get all of the capital they will need to operate under the new rule. Bove believes the GSEs will have to issue a lot of shares to raise that capital, but the bull case for Fannie Mae and Freddie Mac suggests they will be able to build it through retained earnings instead of issuing shares. Tim Pagliara of CapWealth Advisors has argued previously that the GSEs will indeed be able to build their capital through retained earnings instead of shareholder dilution.

If everything goes as planned, the GSEs' senior preferred shares will be eliminated and declared paid. They will then be able to retain their earnings without having to set aside money for dividends that have been declared but not paid. The equity side of their balance sheets will look much better.

Bove said that assuming the two companies continue to grow their earnings at the same rate as they did in the third quarter, they will be able to increase their retained earnings by $26 billion every year.

Adjustments to the balance sheets

By the beginning of 2023, the combined equity of Fannie and Freddie would be $52 billion higher, and their earnings per share on their stock would be up 150%. Based on the higher earnings, the price of Fannie Mae and Freddie Mac common shares may have reached $5 per share.

Further, the dilution from converting the junior preferred shares would be about 40% less, and the dilution from issuing new shares would be 67% less. The multiple on the stock would be higher also, reflecting the higher return on equity. The projected price of the stock after share issuance would be 205% higher.

1 2
View single page >> |

Disclaimer: This article is not an investment recommendation, Please see our disclaimer - Get our 10 ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.