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Summary

  • Northern Trust has recently issued $400 million worth of preferreds.
  • The yield on cost is 6% which is good for income investors.
  • Northern Trust has an underlying S&P rating of A-.

Last month, Northern Trust (NASDAQ:NTRS) issued $400 million worth of new preferreds. The new series C preferreds yield at par is 5.85%. However, the value of the preferred has dropped. The yield on cost is about 6% now. I believe that Northern Trust's preferred presents a good opportunity for income investors looking to park their extra cash.

While 6% may not seem like a strong yield in the preferred space, we need to look at the underlying company to determine if we are getting a good deal. Northern Trust is one of the largest asset management firms in the world. As of June 30, 2014, total AUM was $924.4 billion. This is a 15% growth over the prior year.

Northern Trust currently maintains a very strong credit rating. S&P rates the company a A- and its Moody's rating is Baa2. Northern Trust has continued to improve its credit quality and capital ratios remain well above regulatory requirements. In 2Q2014, the company reported a revenue growth of 6% and a net income growth of 10%.

I believe the new preferred is a good risk-reward opportunity. When I initially saw the announcement of this issuance, I was slightly skeptical since a 5.85% yield is not something to get excited about. However, the value of the preferred has dropped and I believe the market understands the underlying strength of the company. Now with the yield at almost 6%, the downside of the preferred is somewhat limited.

This preferred is for individuals looking to park their excess cash at a 6% yield with a strong credit rated corporation. My recommendation is for income investors to buy in increments. My downside case with this preferred is a yield on cost of 6.25%. This would put the price at $23.40, which is $1 less than the current price. To put this into perspective, Wells Fargo (NYSE:WFC) has an S&P rating of BBB+ and its new series T, which was also issued last month, has a yield on cost of 6.15%.

Northern Trust's new preferred may not look appealing at first, but in reality it is a good yield for a company that continues to grow revenue and net income. I believe it will provide stability for portfolios going forward.

Source: Park Your Cash With This 6% Yield