By Vitus Vrynn
The recent downturn in the stock market has raised some wary eyebrows for investors, causing the dollars to fall more slowly into the companies that breathe life into it. However, that does not mean that it is a poor time to invest; quite the contrary, it's the best time to enjoy the benefits of investing capital into the increased security of preferred stocks instead of the topsy-turvy unpredictability of common stocks.
Preferred stocks in major financials can offer even more security because of domestic dependency on private lenders. Each major financial firm is vying more than ever for confidence of investors, and when I look at all the major developments, it's not incredibly hard to discern how the change of fates will play out.
Of the most struggling, I think Morgan Stanley (MS) is among the most capricious of financials because of the hot water it is currently stewing in regarding robo-signing. While many of the other companies discussed in this article have faced some level of adversity including Fed citations and other penalties due to the mortgage crisis, I think Morgan Stanley might be hit the hardest. On top of the order by the Fed to hire outside consultants, some of them don't even possess prior experience regarding mortgages, and I can't help but imagine there is some level of corporate negligence involved, if not sheer nihilism.
When I put the pieces of the puzzle together, I get a picture that leaves me uncomfortable and checking my pants pocket to make sure my wallet is still there even though I don't own stock in Morgan Stanley (or any of the other companies discussed in this article for that matter). That being said, I don't recommend Morgan Stanley ... at least not until it proves that its business decisions are dictated by savvy executives, not directionless automatons.
Goldman Sachs (GS) is finding itself in a similar boat because of robo-signing, and I would place it only slightly above Morgan Stanley. Despite the recent releases surrounding Greg Smith's departure, whatever explicit damages Goldman Sachs has caused to the economy as a whole (a significant achievement in terms of negligence if you ask me) have already occurred and with the leering eyes of both the public and media bearing down on it, it's likely the executives in charge will watch their steps very closely. That should keep Goldman Sachs clean enough in the eyes of the Fed for a while, at least.
As for preferred stocks, the only one I might recommend for the moment is its Series B preferred (GS-B), although the dividend is fairly meager at 6.20%. It still might be nice to keep for a while though because of Goldman Sachs' extremely long time on Wall Street makes the possibility of going under virtually impossible, and the recent sale of its Litton Loan Servicing subsidiary will increase cash flow enough to ensure that dividends are paid. As an added bonus, this preferred has been callable since 10/31/2010, so it's always possible to drop it at the first sign of danger.
Bank of America (BAC) has been performing above expectations and it has been responsibly looking out for both investors and its own interests by pursuing legal action against the Roberts brothers for $34 million and change. As the terms of the brothers' arrangement with Bank of America was not met, the lawsuit should prove successful on the lender's behalf. Actions like this will keep cash flowing and allow Bank of America to pay its dividends.
The preferreds of Bank of America that I think investors will want to look at are its Series H (BAC-H) and J (BAC-J) stocks. The non-cumulative distributions are 8.20% and 7.25%, respectively. I think the real winner here is the H series because the distribution rate is just superb, however the J series has a call date that is seven months earlier (11/01/12 as opposed to 05/01/13) which is always a nice safety option in case the market gets more volatile than it has been, however likely that might be.
Moving up the ladder, JPMorgan Chase (JPM) has proven itself to be a consistent and strong contender and has even managed to avoid the slew of citations and errors that many of its competitors have been linked to. We can see the confidence JPMorgan Chase has in its leaders, and I was particularly drawn by the favorable review its James "Jes" Staley received compared to Bank of America's James Montag. Staley's award reflected how he played a major role in successfully handling the debt crisis in Europe, as well as JPMorgan Chase's net income reaching record highs.
The unparalleled height of income for the firm demonstrates a strong ability to maintain an increased cash-flow, and I have no hesitation about recommending JPMorgan Chase's preferred series stock as a very wise investment. The J-series stock (JPM-I) has an extremely high distribution at 8.625% which reflects how well the company has been doing. Even though the call date is 09/01/13, the perpetual maturity of the stock and strong performance of the company makes it a no-brainer.
As my dark horse choice to keep an eye on, I really like what Wells Fargo (WFC) is doing with branding to increase cash flow and appeal to the upper class, thus increasing this group's incentive to give their money to Wells Fargo. The Occupy Movement's attention to the "1%" in the past year has only underscored the magnitude of high-net worth clients in the financial world, and Wells Fargo seems to have taken notice and acted accordingly with its Abbot Downing brand.
The foresight Wells Fargo has demonstrated is the prime reason I'm recommending its Series J preferred stock (WFC-J) as my number one pick to keep an eye on. The stock itself has a later call date than any of the others listed in this article at 12/15/17, but at a highly respectable 8% the dividends are competitive and make it worth any sort of long term risk. I would say that this preferred series is just under the JPM-I, but creative solutions like the Abbot Downing brand suggest this might not always be the case.