The Selloff in Preferred Stocks May Be Overdone

The I-Shares Preferred Stock Index Fund (PFF) seems to be trading as if no preferred stocks will be paying dividends in the near future. I find that difficult to believe. From what I can tell, the blended holdings in the index are trading at about a 50% discount to par. Considering the fund is roughly 50% trust preferreds and 50% straight preferreds this begs further analyses.

Trust preferreds are basically junior debt and are senior to perpetual preferreds in the capital structure. All indications are that these types of securities are not going to be wiped out in bailout or rescue situations the way Fannie Mae (FNM) and Freddie Mac (FRE) preferred securities were wiped out last year. Let’s assume for a moment that a few are wiped out. Yesterday’s market price on PFF still would imply virtually all the straight preferreds will be nearly wiped out.

Looking through the funds holdings I see issues from Freeport McMoRan (FCX), Schering Plough (SGP), and Public Storage (PSA) listed in the top ten holdings along with the 80% of issues that are from financial companies. It’s obviously the financial weighting causing the fund to decline as it has and one could envision a scenario where federal bailout money comes with restrictions on payment to both types of preferred securities. All this and more however seems baked into the price of PFF today.

Comments

[tsinvest:]

My brain tells me you are absolutely correct and that I should be backing up the truck and loading up on PFF. My gut tells me PFF, as most other securities, is trading on emotions at the moment - more fear, less greed. Nevertheless, I think buying and holding PFF will prove a wise decision a year or two out. If you bought it and fell asleep for two years then awakened, you would probably be very happy with the results.

Mar 06 07:00 AM

[shootpar2001:]

general agreement here.
one must due their homework, but most holdings are oversold.
long term holders (and all holders of prf'ds should be) will be rewarded.

Disclosurers: (PSY), (PFF).

Mar 06 09:37 AM

[CWest:]

I have somewhat same enthusiasm. Could either of the above authors tell me how much of the current payments are 'return of capital' and how much is true dividend for either psy or pff

Mar 06 10:32 AM

[rayman:]

I think so too! (disclaimer, own APR PFF calls)

Mar 07 06:41 PM

[meta9999:]

ETFCONNECT.com shows the financial weighting now at 87%, not 80%... also pff is only trading at about a 2% discount to NAV. Of course, the problem is that the NAV is probably not a true reflection of real value. However, that being said, I'm probably not as bullish as on this as the rest of the responders, only because I think there are better values in the individual issues rather than the fund. Still, tho, I think it will make a good investment over the next 1-3 years

Mar 08 02:21 PM