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.