The recent market turnoil has presented a multitude of opportunies for buying high yielding, quality securities. We are talking about investment grade issues that fell by as much as 70% during October and have recently started to recover to a more appropriate level.
Lately we have been researching the securities of Lincoln National Corp (LNC). Lincoln National is a large life insurance company which also offers annuities, mutual funds and asset management services. The companys common shares as well as its preferreds and exchange traded debt issues took a servere beating during the month of October.
Specifically, the issue we like the most is a 6 3/4% exchange traded junior subordinated debenture (LNC-PG) trading on the New York Stock Exchange at $15.55/share with a current yield of 10.87%. In October this same issue traded under $10 which was down from near $25 in September. This issue is redeemable in 2011 at $25 plus accrued interest.
For those unfamiliar with exchange traded debt issues a further explanation may be helpful. These are simply debt securities issued by a corporation - normally at $25 that trade on one of the major exchanges. They are bought and sold like common stock with the same commission structure. Typically they are redeemable 5 years after issue at $25 plus accrued interest. Of course whether they are redeemed depends upon many factors - not the least of is the ability of the company to borrow at a rate more favorable than the coupon on the redeemable securities. Lastly these issues are generally thinly traded and we always use 'limit orders' when buying or selling.
As we study Lincoln Natonal Corp we see that they have historically done very well. Of course with the credit crunch Lincoln National's investment portfolio took a hit during the last number of months and their earnings for the quarter ending 9/30/2008 were off by 55% (see conference call transcript). Earnings like this, while not desireable, give us an opportunity to pick up what we believe are great bargains such as the issue mentioned above.
While there may be some rocky times ahead for a few quarters we believe that securities like the Lincoln National 6 3/4% debentures around $15-$16 present the appropriate reward for the risk assumed and should be considered for any income portfolio.
Disclosure: Author holds position in LNC