Merrill Lynch a sure bet, but use a discount broker
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Dear Mr. Berko:
I have an account at Dean Witter & Co. and felt lucky in May to buy 500 shares of Merrill Lynch 8.625 Percent Series 8 preferred stock at $25 with a good 8.625 percent yield at the initial public offering price. Several months later my 500 shares, which cost me $12,500, were trading at $18 and I had quickly lost $3,500. I was concerned but didn’t think Merrill would go out of business, so I called to buy another 500 shares because the yield at $18 was almost 12 percent. The broker said it was dangerous and suggested that I sell the 500 I had already purchased. He said the commission would be about $245.
That sounded like a lot of money too me, so I called Merrill Lynch & Co. The Merrill broker was vague on whether I should sell and said it would cost me $257 to sell, so I called my Dean Witter broker and sold the stock through him. Now that it is selling for $20 and yields 11 percent, I wonder if I did the right thing.
R.T., Aurora, Ill.
Dear R.T.:
The Good Lord must have a special place in his heart for fools, which is probably the reason he made so many of them. I’d rather feed my hand to a woodchopper than pay Dean Witter & Co. or Merrill Lynch & Co. a $250 commission for a 500-share transaction when Charles Schwab & Co. will sell the whole shebang for $12.50.
In this difficult market you need to be a smart investor, so move your account to Schwab or Ameritrade. Only a real moke would pay Merrill a twentyfold increase in commissions, which the brokerage industry calls the “ultimate hustle.”
Your Dean Witter broker gave you lousy advice and charged you $245 to hear it. Those 500 Merrill shares now trade at $20 with a delicious 10.78 percent return. So I’d advise you to repurchase them through Charles Schwab. It will cost $10,000 plus $12.50 commission plus a $5 to $9 in add-on costs.
I’m going to give you an absolutely guaranteed maybe (there are few stronger guarantees) that Merrill will continue to pay all the interest due on its 8.625 percent preferred. When John Thain and his Goldman Sachs Group Inc. toadies began to infest Merrill, they had an inkling of how troubled the waters were. They were wisely advised in September 2007 to immediately jettison some $29 billion in assets but scoffed and snickered at that advice.
Now Thain and his toadies wish they had listened because those assets are bringing about $8 billion less today than they would have had they been sold last September. Merrill is in big trouble because the “$80 billion in excess balance sheet liquidity” Thain bragged about in late 2007 was probably a number he pulled out of his nose. It ain’t there. So Thain and his Goldman dilettantes are relegated to picking apples from the Merrill barrel and selling them on the cheap.
The company’s preferred dividend obligations total $270 million.So Thain’s next move should be to eliminate the $1.40 dividend on Merrill’s common stock ($1.4 billion), which is equal to five years of all of its preferred dividend payouts combined. And Merrill will meet its preferred dividend obligations and Merrill will meet them on time. If Thain fails to pay its preferred dividend obligations, Merrill might as well close its doors because the company will be the laughingstock of the investment community.
So buy another 500 shares of the 8.625 percent preferred. Its 10.78 percent dividend yield is your silver lining in Merrill’s dark cloud. But use a discount broker.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service
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