4 Preferred Stocks For Investors To Consider In Uncertain Times

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 |  Includes: AEG, BAC, GS, HSBC
by: Investment Underground

By Roger Choudhury

The Bank of England is pumping another £50 billion in money to prevent the U.K. from falling into a significant recession, and the U.S. is stuck in stagnation. Additional uncertainties surround us, so consider adding more preferred stocks to your portfolio. Below, I focus on those with floating rates to anticipate rising interest rates. Additionally, with the Fed targeting 0%-0.25% for the federal funds rate, you can get better yields with the following:

AEGON (NYSE:AEG) (Floating Rate Perpetual Capital Securities)

Recent Price

$20.11 per share

Callable?

Yes, at $25.00 per share, since Dec 2010

Possible for 21.9% capital appreciation

Preferred Stock IPO

Nov 2005

Dividends

$0.2555 per quarter

All payments made since inception

Next dividend payment is on Mar 15

Record date is on Mar 1

Current yield

4.9%

S&P Rating

BBB

52 week trading range

$15.22 - 23.92

2009 lows

~$3 (from $26)

Ticker symbol (Yahoo! / Google / Fidelity)

AEB

Click to enlarge

Technically, these are floating rate capital securities, which give investors combinations of the features of corporate bonds and preferred stocks. These dividends are tax-deductible for the issuer, unlike common and preferred stock dividends.

The quarterly dividend payment is the greater of 4.00%, or the 3-month LIBOR plus 0.875%.

In 9M11, EBIT has expanded by 15%, improving the coverage of preferred dividend payments (pdf). Desiring to increase normalized operating free cash flows by 30% by 2015, this offers even more assurances that the company will continue to make distributions. Although it is investment grade, I am worried by its tumble to $3 per share in 2009. Thus, I recommend this security for investors who have a fixed-income portion of their portfolio, but not for investors that solely rely on dividends for income.

Bank of America (NYSE:BAC) (Floating Rate Non-cumulative Series 2)

Recent Price

$17.26 per share

Callable?

Yes, at $25.00 per share, since Nov 2009

Possible for 42.8% capital appreciation

Preferred Stock IPO

Mar 2005

Dividends

$0.191670 per quarter

All payments made since inception

Next dividend payment is on Feb 28

Record date is on Feb 15

Current yield

4.4%

S&P Rating

BB+

52 week trading range

$10.22 - 17.86

2009 lows

~$3

Ticker symbol (Yahoo! / Google / Fidelity)

BML-PH / BML-H / BML/PH

Click to enlarge

The dividend disbursements equate to the 3-mthreeonth U.S. dollar LIBOR plus 0.65%, but will not be less than 3% per year.

In FY 2011, the loss before taxes shrunk to $230 million from $1,323 million, providing more confidence that preferred dividends are safe for several more years. The debt to equity ratio has also lowered to 1.89 from 2-plus levels. Also, keep in mind that this series has made all dividend payments since inception in 2005. I suggest BML-PH to more aggressive income investors, seeking to replace an equity that has low appreciation potential. When interest rates are higher several years from now, you should be able to sell this near $25, and along the way, you would have collected plenty of dividend payments.

Goldman Sachs (NYSE:GS) (Floating Rate Non-cumulative Series A)

Recent Price

$19.50 per share

Callable?

Yes, at $25.00 per share, since Apr 2010

Possible for 26.5% capital appreciation

Preferred Stock IPO

Apr 2005

Dividends

$0.239580 per quarter

All payments made since inception

Next dividend payment should be on May 10

Record date should be in the third week of Apr

Current yield

4.8%

S&P Rating

BB+

52 week trading range

$16.56 - 23.45

2008 lows

~$8 (from $26)

Ticker symbol (Yahoo! / Google / Fidelity)

GS-PA / GS-A / GS/PA

Click to enlarge

The floating rate will be either equal to the greater of 0.75% above LIBOR or a minimum of 3.75%.

EBIT fell by 52% in FY 2011 and interest expense rose by 17%, raising concerns. However, S&P downgraded this security by only one notch to BB+. The implementation of the Basel 3 regulations will require further capital raising, but Goldman Sachs is a resilient firm. I would still recommend this for investors who are seeking reliable dividends, but also willing to take on a modest amount of risk.

HSBC (HBC) (Floating Rate Non-Cumulative Series F)

Recent Price

$18.48 per share

Callable?

Yes, at $25.00 per share, since Apr 2010

Possible for 33.3% capital appreciation

Preferred Stock IPO

Apr 2005

Dividends

$0.223612 per quarter

All payments made since inception

Next dividend payment should be on Apr 2

Record date should be Mar 15

Current yield

4.7%

S&P Rating

A-

52 week trading range

$13.45 - 23.50

2009 lows

~$5 (from $26)

Ticker symbol (Yahoo! / Google / Fidelity)

HBA-PF / HBA-F / HBA/PF

Click to enlarge

The floating rate is equivalent to the 3-month LIBOR plus 0.75%, but will not be less than 3.50% annually.

Underlying EBIT for 3Q11 was $3.0 billion (-$1.6 billion vs. 3Q10), and 9M11 was $14.4 billion (-$0.3 billion vs. 9M10). The company is also in the process of refocusing itself, which should not affect the payment of preferred dividends. It has announced transactions for the disposal of its U.S. Cards business, 195 non-strategic branches principally in upstate New York, the Canadian investment advisory business, the Chilean retail banking business, the U.K. motor insurance business, private equity businesses in the U.S. and Canada and its Hungarian consumer finance portfolio.

This has an A- rating, and I recommend it highly. Keep in mind that this is medium risk, so retirees should be aware of how much risk they are willing to take on. More aggressive investors would be well-served to consider purchasing HBA-PF.

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