Ford Preferred: Conversion Premium Drops as Common Shares Rise

Dec. 6.10 | About: Ford Motor (F)

By Richard Bloch

In his post on preferred stocks, Jim Trippon published my chart comparing how Ford (NYSE:F) has been trading against the Ford convertible preferred shares (F.P.S), but the ratio between the two has changed since I first created that chart back in September.

While in September the Ford preferred shares traded at close to 4 times the price of the Ford common stock, now the ratio is quite a bit lower, as shown on the chart below:

click to enlarge

Click to enlarge

Remember that each share of the Ford preferred stock can be converted into 2.8249 shares of Ford common stock, so the preferreds are trading much closer to their conversion value now.

Why?

One reason is that, with the preferred shares now closer to their par value of $50, there’s a higher chance that the company could redeem them. That means Ford would cancel the preferred stock and convert them into common stock. See the prospectus for more details on how this works.

As long as the preferred stock remains outstanding, these shares should move in concert with the common stock – at least based on their convertibility value – but there may not be as much as a premium now as there was back in September.

One advantage to owning the preferred stock is that these shares pay a dividend of $3.25 per share. Here’s a chart showing the yield based on how F.P.S. has been trading:

Click to enlarge

Back in September, when the shares were trading at around 47.50, that represented a yield of 6.8%, but with the stock now higher, the yield is now more like 6.3%.

One comment on the chart: Ford suspended its dividend in 2009, but reinstated it in June this year, which could be why the preferred stock began rising, thus reducing its yield.

In a sense, a convertible preferred is like owning stock with a call option on a company’s common shares. Unlike a call option, however, the preferred can be redeemed at the company’s direction. In this case, the option is still there, it’s just that the premium isn’t nearly as high as it once was.