Utility Preferred Stocks: My Top Picks Below Par

Includes: EIX, PCG, SRE
by: Rubicon Associates

When I wrote the article Utility Preferred Stocks My Top Picks for Income, the most frequent comment I got was that the preferreds I looked at and chose as income investments were trading above par. The purpose of this article is to offer alternatives that are trading below par. All information is taken from company filings, QuoteMedia and Quantum online and AdvFn.

The first utility is PG&E Corporation (NYSE:PCG), which is a holding company that conducts its business through Pacific Gas and Electric Company. The utility's revenues are generated mainly through the sale and delivery of electricity and natural gas to customers. The utility served approximately 5.2 million electricity distribution customers and approximately 4.3 million natural gas distribution customers at December 31, 2011.

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Stats on PCG are:

PG&E corporation's common equity currently yields 4.37%, giving the best selection of the above preferreds (PCG-H) a yield advantage of 52bps and it trades at a discount of 8% from par. To be frank, I don't view this as all that compelling.

The second utility is Edison International (NYSE:EIX), which is the holding company for Southern California Edison Company (SCE), a California public utility corporation; Edison Mission Energy (NYSE:EME), an independent power producer, and Edison Capital, an infrastructure finance company. it operates in two segments: an electric utility operation segment (SCE) and a competitive power generation segment (NYSE:EMG). SCE is engaged in the business of supplying electricity to an approximately 50,000-square-mile area of southern California.

EIX's stats are:

EIX's common equity currently yields 3.07%, giving the best selection of the above preferreds (SCE-C) a yield advantage of 182bps and it trades at a discount of over 13% from par. This is more compelling to me than the PCG preferreds, and perhaps the most compelling of the three utilities mentioned here.

The third utility is Sempra Energy (NYSE:SRE), which is a holding company. The Company operates in six segments: San Diego Gas & Electric Company (SDG&E), Southern California Gas Company (SoCalGas), Sempra Generation, Sempra Pipelines & Storage, Sempra LNG (liquefied natural gas) and Sempra Commodities.

Sempra's stats are:

Sempra Energy's common dividend yield is 3.31%, giving the preferred a yield advantage of 165bps and it trades at over a 7% discount from par. This is more compelling than the PCG, but perhaps less compelling than EIX.

As you can see, these do not have the same types of yields as those selected in my first article, but they satisfy the requirements of those investors looking for utility preferreds that yield above common stock and trade at a discount to their par value. A summary of my first article's preferred stats is:

As we see from this, the current yield average was 5.79%, which cannot be replicated with preferreds trading at a discount to par. The discount securities outperform on a yield to call basis as they would have decent gains if called.

Conclusion: While the utilities' preferred stocks mentioned above do not have exceedingly juicy yields, they do have yields above their company's common shares and trade at a discount. If I had to order my picks in terms of attractiveness, the order would be as follows:

  1. Edison Intl's SCE-C,
  2. Sempra's SDOGP, and
  3. PG&E's PCG-H

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