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by Roger Choudhury

Spanish and Italian bonds are performing a risky high wire act. Rising prices at the pump are also eating into US consumers' wallets, and European governments are nervously watching as Americans buy fewer exports. Odds are that the ECB is going to have to print more money for banks in Spain and Greece.

Given these recent market uncertainties, you ought to consider adding more fixed-income instruments to your portfolio. Here is a list of 3 investment grade preferred stocks to ride out the ebbs and flows of this market.

US Bank (USB) (7.189% Depositary Shares Non-Cumulative Perpetual Preferred Stock, Series A)

Recent Price

$776.65 per share

Callable?

Yes, at $1000 per share, since Apr 2011

Dividends

$0.455 per quarter

Next dividend payment is on Jul 16

Record date is in the final week of Jun

Current yield

4.4%

S&P Rating

BBB+

Ticker symbol (Yahoo! / Google / Fidelity)

USB-PA / USB-A / USB/PA

The ratio of earnings to fixed charges is an impressive 3.56. Also, preferred stock dividends only summed to $168 million. Fixed charges have fallen by 59.8% to $2.618 billion. Net income has also returned to 2007 levels, which is now $4.872 billion. The tier 1 capital ratio was a healthy 10.6% in 2008 post-Lehman, and it stood at 10.8% at the end of 2011. I say that your preferred dividends are safe for quite some time to come.

For the first quarter, US Bank beat consensus EPS estimates by $0.03 with $0.67. This is 28% higher than the prior year's quarter, when EPS came in at $0.52. Revenues came in at $4.9 billion, again, beating the consensus by $0.13 billion. However, this is $263 million lower from the same quarter in 2011. Total net charge-offs fell to 1.09%, and has fallen for five consecutive quarters.

In comparison, Citigroup's (C) first-quarter revenue rose to $20.7 billion from $17.2 billion in the fourth quarter and $20.0 billion in the first quarter in 2011, excluding CVA and DVA for all periods. This shows a good organic growth story for the firm. It should also give hopes to US Bank and other banks that it is still possible to show growth as the US economy trudges through the housing mess.

In any case, this is not what will affect the share price here. Concerns on the financial situation abroad in Europe and the not-good-enough numbers on housing, Philly Fed, and Empire State Manufacturing will prompt a gradual appreciation over the next few weeks. Along similar lines, in the long run, I expect this to shoot above $800. So, get your 4%+, while you can. I suggest that older income investors with enough financial means ought to consider this. After all, each share is rather pricey.

Goldman Sachs (GS) (Depositary Shares Floating Rate Non-cumulative Preferred Stock, Series A)

Recent Price

$19.94 per share

Callable?

Yes, at $25 per share, since Apr 2010

Dividends

$0.234380 per quarter

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

Next dividend payment is on May 10

Record date is on Apr 25

Current yield

4.7%

Moody's / S&P Rating

Baa1 / BB+

Ticker symbol (Yahoo! / Google / Fidelity)

GS-PA / GS-A / GS/PA

Goldman's ratio of earnings to combined fixed charges and preferred stocks is 1.32. This is somewhat acceptable, when considering that since 2007 fixed charges have been slashed by 73.5% to $8.1 billion. The debt to equity ratio is 2.60, so S&P is right to be cautious by rating this instrument at right below investment grade. However, total preferred dividend requirements amount to $2.683 billion, and the firm will continue to make these disbursements in order to maintain its credit rating. Profits have also increased by 91.3% since 2008, although down by 46.8% since 2010. The firm is on a steady trajectory to consistent profitability and growth.

The latest quarterly results reflect this. EPS rose to $3.92 from $1.56 in the first quarter in 2011, and beat market expectations of $3.55. Revenues did decline by 16.3% to $9.949 billion, but the firm's risk-taking went down by 16% from the same quarter in the prior year and is - 29% from the fourth quarter. An example of this in action is the firm selling its $2.5 billion stake in the Chinese bank, ICBC. The company also confidently boosted its dividend by 31% to $0.46 per common share. All in all, I believe that Goldman Sachs will continue to meet its preferred dividend requirements for the next couple of years.

The recent results give investors more incentive to purchase the preferred shares. I expect a move up of the price to over $20 over the next two weeks. Additionally, due to macroeconomic headwinds, I believe that this will move toward $20.50 over the next couple of months. I am comfortable to recommend this to risk-averse income investors based on my case laid out above. Moreover, this will not give you an exorbitant amount of yield, and so is a signal that the firm may not call this away for the near future.

Grupo Santander (STD) (Finance Preferred, 6.41% Non-cumulative Guaranteed Series 1 Preferred Stock)

Recent Price

$20.48 per share

Callable?

Yes, at $25 per share, since Mar 2009

Dividends

$0.400625 per quarter

Next dividend payment is on Jun 11

Record date is in the final week of May

Current yield

7.7%

S&P Rating

BBB+

Ticker symbol (Yahoo! / Google / Fidelity)

STD-PI / STD-I / STD/PI

Believe it or not, S&P maintained its investment grade rating on the firm's preferred shares. A reason could be that all dividend payments have been made since inception in March 2004. In 2011, dividends of $2.074 billion were distributed with earnings before taxes [EBT] of $14.295 billion. Consider that the ratio of earnings to fixed charges and preferred dividends was 1.52 at the end of 2010 with EBT of $15.928 billion. So, this ratio continues to be above 1.00.

The firm is also diversified across the world. Despite sharp falls in profits in Portugal, Spain, and the UK, net operating income rose in Latin America and Poland, and is also making inroads in the US consumer business. In sum, revenues rose by 5.3% in 2011. A notable competitor is Lloyds (LYG), which has managed to undergo losses in 2010 and 2011, with a 39.1% drop in revenues. On the whole, I would say that the company is able to make dividend distributions over the next couple of years.

Due to Spanish fiscal troubles, I expect the share price to fall below $20 over the next couple of weeks. At the earliest, it would be advisable to purchase shares after the French election. Candidate Hollande is threatening to renegotiate the December EU treaty, and that will wreak havoc across international financial markets. Over next 12 months, however, I expect this to return to $21, as Spain adjusts to fiscal austerity, and Grupo Santander expands revenues in non-European areas. I do not recommend this for retirees, given the political risk. Only aggressive investors should take a serious look here.

Source: 3 Hot Financial Preferreds To Consider