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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.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.