Teekay Offshore Partners (NYSE:TOO) has announced a public offering of its series A preferred. The preferred will have a coupon of 7.25% and seems like a great opportunity for income investors to grab when shares are made available to the public.
Teekay Offshore owns more than 37 tankers and several oil tankers. It primarily provides services to oil service companies. This is a different preferred from what we typically see. Usually financial institutions and mREITs are big in this space. It's nice to see a change of scenery.
Many preferred investors have limited choices in terms of diversification for preferreds. While preferred yields are nice, we don't want all our eggs in the financial and mREIT industry. That could be a bad scenario for your portfolio if certain macro events were to happen.
Whenever investors are looking at preferreds, it's best to look at the underlying company to see the company's ability to pay the distributions. Last year, the company had free cash flow of $180 million. This year, the company is expected to earn a $1.37 per share, which equates to $110 million in net income. So the company should not really have a problem covering $10.8 million in dividends for the series A.
While the series A is not out yet, it will be soon. I urge income investors to be on the lookout for it when it gets listed. Given its yield and exposure to the energy industry, it seems like it could be very appealing for many income investors. With this in mind, the value of the preferreds could jump well above par.
Manage your risk when purchasing these preferreds. Buying below par is great, but if you miss the opportunity, do not chase the price. Although if it stays around $25.00-$25.10, then it's worth a buy as long as you are willing to hold long-term. Various brokers will have different naming conventions for the preferreds. They might be listed as TOO-A, TOO PRA, TOO-PA, etc. Please check with your broker if this is your first time buying preferreds.
Additional disclosure: I plan to take a position in TOO-A.