Seeking Alpha
Profile| Send Message|
( followers)  

These seven preferred stocks from Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) represent compelling buys. These banks are well-connected and "too-big-to-fail" and so their preferreds are, in my view, effectively insured by taxpayers. Here are the best bets going forward. I chose preferreds with only future call dates and added the GS preferreds because they are selling at or below par with shares callable only in the last year. These all have a Moody's rating of Ba3 or higher.

Bank of America, 7.25% Dep Shares Non-Cumulative Preferred Stock, Series J

Bank of America (BAC) has a Ba3 rating overall and rolled out the BAC.J series at 7.25%. Take advantage of the weakened price for these preferreds. Essentially the market is saying that BAC cannot meet its obligations. However, besides the implied taxpayer backstop, BAC has a current ratio of 1.00 and total cash of $606 billion. The preferreds are only junior to BAC senior debt, which is rated Baa1. The J Series price is weaker than the H series because of the yield.

Symbol Moody's Rating Call Date Price Current Yield
BAC-J Ba3 11/01/12 $22.68 8.00%

Bank of America, 8.20% Dep Shares Non-Cumulative Preferred Stock, Series H

The Series H, has the same analysis as BAC above, however you get a higher yield at 8.43% versus a flat 8%. The call date is not until May 2013. These securities do not mature so the strategy is to wait it out until BAC calls these or you get tired of collecting over 8%. Once the call date hits and investors realize BAC is not going out of business, the Series H should trade closer to par.

Symbol Moody's Rating Call Date Price Current Yield
BAC-H Ba3 05/28/13 $24.10 8.43%

Citigroup Inc., 8.125% Dep Shares Series AA Non-cumul Preferred Stock

Citigroup (C) is another banking giant that the taxpayer has backed before, and this is implied in Citi's preferred stock that is trading above par. Nonetheless, investors collect a 7.84% yield on an underlying company with a current ratio of 1.12. If anything, the price is depressed because of uncertainty regarding Citi's credit rating that was already downgraded last month to prime minus 2 on short-term debt.

Symbol Moody's Rating Call Date Price Current Yield
C-P Ba3 02/15/18 $25.90 7.84%

Citigroup Inc., 8.50% Dep Shares Series F Non-Cumulative Preferred Stock

I included the Series F (C.M) because the call date is in mid-2013 and, in the mean time, even if the series is called you still collect a 7%+ adjusted yield. These notes do not mature, and, just as is the case with other banks, Citi will not prioritize calling these notes. Thus, you have a put-equivalent protection at par $25 starting mid-2013. After the call date, with Citi still surviving, these would not sell below par.

Symbol Moody's Rating Call Date Price Current Yield
C-M Ba3 06/15/13 $26.02 8.19%

Goldman Sachs Group, 6.20% Dep Shares Non-cumul Preferred, Stock Series B

The Series B is a mild arbitrage play on Goldman (GS) which is still the world's most important investment bank. The call date has passed, but here, the Series trades slightly below par of $25. The yield is an effective 5% assuming these are called in a year, or, in other words, you have $0.06 cents of built-in gain. GS has a current ratio of 0.78, and, for GS, meeting preferred obligations is paramount.

Symbol Moody's Rating Call Date Price Current Yield
GS-B Baa1 10/31/10 $24.94 4.93%

Goldman Sachs Group, Dep Shares Float Rate Non-cumul Preferred Stock, Series A

The A Series also provides an arbitrage play that just went ex-dividend on October 24, 2011 with a $0.23 payment. These are callable at $25 as of April 10, 2010, and, as shown in the price action, Goldman is not in a hurry to call these notes because they do not mature. This is a good option to park cash and attempt to outpace treasury bill yields. These notes are down over 7% year-to-date, and, at this point, downside is limited.

Symbol Moody's Rating Call Date Price Current Yield
GS-A Baa1 04/10/10 $19.44 4.89%

Goldman Sachs Group, Dep Shares Float Rate Non-cumul Preferred Stock, Series C

The Series C yield at a rate equal to 0.75% above LIBOR or 4%, whichever is higher. Callable at $25, these are also a good bet for investors looking to beat t-bill yields. If Goldman calls these it must pay up the $25 per unit. At present, these yield 4% at par. Around $20 these have very little downside.

Symbol Moody's Rating Call Date Price Current Yield
GS-C Baa1 10/31/10 $20.10 5.02%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Big Bank Preferred Shares On Sale Now