General Electric (GE) has come through the financial crisis as strong as ever and while the share price still has a long way to go to get back to pre-crisis levels, fundamentals have undoubtedly improved. This is true also with Capital as it has been methodically downsized over the past few years at the behest of management's ambitions to shrink the banking giant's influence on the consolidated company. Apart from buying the common shares, which carry with them inherent stock market risk, income investors can take advantage of GE's continuous fundamental improvements by purchasing exchange traded debt, such as the GE Capital 4.875% Note due 2052 (GEB); the prospectus can be seen here.
This debt, issued in $25 denominations, was issued by GECC late last year with the first dividend payment being made in mid-January 2013. The security pays a quarterly dividend of 30.5 cents, good for a coupon rate of 4.875%. However, shares have tanked since the "taper talk" began by the Fed earlier this year and are now trading for $20.75. As a result, the $1.21875 annual dividend rate is now producing a current yield of 5.9%; roughly double that of the common stock.
In addition to this, these debt securities, which mature in October of 2052, are callable beginning in October of 2017. Of course, the call price is the liquidation and issue price of $25 per share so in the event that shares are called early, investors would be entitled to not only receive dividend payments on their shares but also the discount of more than $4 per share that currently exists. Under a scenario where shares are called in October of 2017, GEB investors who get in the shares now would see not only approximately $4.57 in dividend payments between now and then but also $4.25 per share in capital gains due to the discount on shares to their liquidation preference. This example would amount to a 42% return on an investment today in less than four years on a debt security of a Dow component. Most stock market investors would be happy with these returns but the beauty of this security is that GE simply needs to remain in business for these gains to accrue and call GEB when that option is available. If GE doesn't call GEB you can continue to receive the ~5.9% yield on shares at present without having to worry about stock market risk.
Of course, there is interest rate risk to owning any kind of debt security and one must be aware of these risks if deciding whether or not to get long GEB. The reason shares have fallen from $26 to less than $21 this year is because of rising interest rates; as other interest-bearing securities become more attractive to own this security will become less attractive relative to higher-paying risk free assets, for example. As such, investors in GEB could see some swings in the value of shares based upon the whims of the interest rate markets but that is the reason one should seek out a discount to liquidation preference when purchasing a debt security; there is built-in cushion against such movements. And the kicker is if GE calls this debt, you are sitting on a very nice capital gain as well.
GEB isn't for everyone but if you are an income investor looking for a safe place to park your money while still getting a nice yield, GEB may be the ticket for you. It offers not only a great yield but a sizable discount to its liquidation preference and a very strong payer in General Electric. The combination of these factors make GEB one of my favorite income picks as the possibility of the debt being called and creating huge capital gains in addition to a nearly 6% current yield are just too good to pass up.