Investors in BB&T (NYSE:BBT) shares receive a nice dividend, currently around 2.7%, but are subject to stock market volatility and earnings-driven gains and losses. The company is a very strong, well-managed bank and while 2.7% is a nice dividend for those that are focused on a total return, including capital gains, income investors may want more. You can still gain exposure to BB&T and more than double the common stock's dividend rate by getting long another BB&T security. In this article, we'll take a look at that security to see if it could be a good fit for your portfolio.
The security in question is BB&T's Series F Non-Cumulative Perpetual Preferred Stock, which trades under the symbol BBT-PF or BBTPF, depending on your broker. The issue, which is relatively new at only a couple of years old, could provide the strong income that investors need for a retirement account, for instance.
To begin, the Series F is a non-cumulative preferred stock. That means that dividends are not required to be paid. This sounds terrible but know that the last thing a bank wants to do is stop paying its preferred dividends as the backlash from the capital markets would be tremendous. BBT is one of the best managed banks in the country and is quite prudent at managing risk; I see the risk of missed dividends at basically zero for the Series F but know that there is a very remote possibility that BBT could suspend payment on the Series F if needed. Again, I think the risk of this is as close to zero as possible and issuing non-cumulative preferred stock is standard for banks, so it isn't as though BBT is weaker than other preferred issuers.
Next, the Series F is perpetual, meaning it has no stated maturity date. This makes it a true preferred as some institutions issue preferred stock that has a required redemption date; the Series F has no such redemption rate but it does have a clause that BBT can redeem it at any time beginning in November of 2017. If BBT chose to do so holders would receive the full issue price of $25 per depositary share and if not, shares will continue to trade as normal past the call date.
In addition, the distributions from the Series F are taxed at dividend rates and not as interest income. This means that those holding the Series F in a taxable account could see a meaningful boost in the after-tax yield of the Series F over what it would be if shares weren't eligible for the preferential dividend tax treatment. This is a significant positive for those investors that need current income they can access as it comes in and the Series F provides that.
The dividend provided by the Series F is relatively low at $1.30 per share annually, split into quarterly payments. At the issue price of $25 that is good for a yield of 5.2%. This is about double the common stock's yield but in terms of preferreds, that's pretty low. However, shares have traded down from the issue price to $21.83 as of this writing, making the current yield much higher at 6%. This is a much stronger yield and given the strength of BBT's business and its robust balance sheet, we shouldn't expect it to trade much higher than that anyway.
Given that the Series F is a perpetual preferred stock, it will be subject to interest rate risks. The coupon on the Series F is pretty low at only 5.2% which is why shares have traded down below $22, as I mentioned before. And if we see interest rates spike we'll likely see the Series F trade down further in order to reset for higher yields overall. Of course, the opposite is true as well; if rates continue to move down, we'll likely see the Series F move up. The important thing to know is that it will be subject to interest rate movements and thus, the Series F is not a trading vehicle. If you want to own it, you'd be wise to buy it for a long term hold as the price will move around on you.
There are risks to owning the Series F, as there are with any preferred stock, but BBT is as strong of an issuer as you will find in the capital markets. The yield of 6% is certainly lower than other issues but considering the source, it's quite good. If you are an investor that needs a steady source of secure income, you can do much worse than the Series F.
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.