Wells Fargo & Co (WFC) will see lowered warrant prices should its dividend exceed approximately $1.36, and its long-dated options give shareholders protection until 2018, says Dan Sheehan, Managing Partner of Sheehan Associates LP and Credit River Partners, LLP.
“It is rare that you get to buy a long-dated option on any publicly traded security. For the most part, I don’t think I can price stock options if they have an expiration date that is a month or two or even a year away. But these don’t expire until 2018, and they’re also protected in terms of a price based on the dividend at the time that they were issued,” Sheehan said.
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Sheehan likes the WFC investment because if the company’s dividend goes above around $1.36, the price of the warrants will be lowered, offering upside and the ability for WFC to weather short-term volatility.
“Wells hasn’t gotten up to that point yet, but if their dividend goes above, I think it’s $1.36 or something like that, anything above that lowers the price of the warrant. Something like that gives you upside; you can value it because it’s far enough out into the future that the short-term volatility sort of gets averaged out. It is a good business that I can understand, and this gives me a much less risky way to get some leverage on what I think the business is worth,” Sheehan said.
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