3 Trust Preferreds For High Yields Now

|
 |  Includes: FITB, KEY, RF, USB, ZION
by: Investment Underground

by Roger Choudhury

Edward Deicke of JHS Capital Advisors recently pointed out that trust preferred stocks would not count toward an institution's tier 1 capital under the Dodd-Frank regulations. Because many of these securities are high-yielding, they are almost certain to be called away by 2016, and reissue preferreds and bonds at lower yields to cash in on the low interest rate environment.

For example, US Bank (NYSE:USB) has already called away two series, and has announced calls for two other series of trust preferred securities. The USB Capital VIII 6.35% Trust Preferred Securities and USB Capital X 6.50% Trust Preferred Securities were redeemed on February 22, 2012. The USB Capital XI 6.60% Trust Preferred Securities and USB Capital XII 6.30% Trust Preferred Securities are slated for call on May 10, 2012. The only series that has not been called is the USB Capital IX 6.189% Fixed-to-Floating Rate Normal Income Trust Securities.

This time, I focused on regional banks. You will notice that the shares trade somewhat above par value, but you should make up for a future call by collecting two dividend payments. These are worth it, because of the high yields, even after taking into account the taxation of dividends as ordinary income. Without further ado, here is what I found:

Fifth Third Bank (NASDAQ:FITB) (Capital Trust VI, 7.25% Trust Preferred Securities)

Recent Price

$25.48 per share

Callable?

Yes, at $25 per share, after Nov 14, 2012

Dividends

$0.453125 per quarter

Next dividend payment is on May 15

Record date is in the second week of May

Current yield (after-tax yield)

7.1% (4.6%)

S&P Rating

BB+

Ticker symbol (Yahoo! / Google)

FTB-PB / FTB-B

Click to enlarge

At the end of 2011, the ratio of earnings to fixed charges and preferred dividend requirements is 2.83. The company has made great progress from 2007, when the ratio stood at 1.50, and from 2008, when earnings were inadequate to cover fixed charges by $2.7 billion. The Bank has also slashed fixed charges by 70.7% to $891 million. The debt to equity ratio has moved downwards from 1.73 in 2008 to 0.76 at the end of 2011. Also, profits are almost near 2007 levels. I believe that it is safe to say that Fifth Third Bancorp should be able to make preferred dividend distributions over the next four years, at least.

I expect the share price to be between $25.25 and $25.60 over the next several weeks, because this has been trading sideways in the midst of good or bad macroeconomic news. Despite the headwinds in China and Europe, this has remained remarkably stable. As such, a good entry point would be soon. I recommend this to income investors that are looking to take on a modest amount of risk, but retirees need not look at this due to the complex nature of the situation.

Key Bank (NYSE:KEY) (Capital X, 8% Enhanced TruPS Trust Preferred Securities)

Recent Price

$25.54 per share

Callable?

Yes, at $25 per share, after Mar 14, 2013

Dividends

$0.50 per quarter

Next dividend payment is on Jun 15

Record date is on Jun 14

Current yield (after-tax yield)

7.8% (5.0%)

S&P Rating

BBB-

Ticker symbol (Yahoo! / Google / Fidelity)

KEY-PF / KEY-F / KEY/PF

Click to enlarge

In 2011, the ratio of earnings to fixed charges and preferred stock dividends was 2.65. The company has made significant progress since 2008, when this ratio was 0.57, and in 2009, it was negative 0.51. Additionally, the Bank cut fixed charges by 76.1% to $638 million. The debt to equity ratio has fallen from a recent high of 2.42 in 2007 to 0.99 in 2011. Profits have also risen above 2007 levels. Based on these figures, I can conclude that your preferred dividends should be paid out for the next few years.

The Case-Shiller 20-city home price index showed a slight tick upward for the first time in ten months, so we may be nearing a bottom in housing prices. Consumers are also spending in retail outlets at a decent clip, given rising gas prices and tepid wage growth. All in all, these are good drivers for growth in Key Bank's revenues. This places upward pressure on the share price here.

It should appreciate north of $26.65 over the next few weeks, moreover, as investors flee equities and seek stable yields in fixed-income. I do not expect this to move down at all, so now would be a good time to get in. I recommend this to income investors who are looking for a regional bank's fixed-income, and are willing to hold onto this for a couple of years. Retirees are better off seeking preferreds that are trading below par value.

Regions Financial (NYSE:RF) (Financing Trust III, 8.875% Trust Preferred Securities)

Recent Price

$25.76 per share

Callable?

Yes, at $25 per share, after Jun 14, 2013

Dividends

$0.5546875 per quarter

Next dividend payment is on Jun 15

Record date is on Jun 14

Current yield (after-tax yield)

8.6% (5.5%)

S&P Rating

B+

Ticker symbol (Yahoo! / Google / Fidelity)

RF-PZ / RF-Z / RF/PZ

Click to enlarge

The ratio of earnings to fixed charges and preferred dividends is 0.95. From 2007, when it was 1.52, it is still down. However, in 2009 and 2010, the figures were 0.34 and 0.30, respectively. This is a step in the right direction. Fixed charges have also fallen by 69.2% to $1.111 billion. The debt to equity ratio has come down from 1.42 in 2008 to 0.62 in 2011. Income from continuing operations before income taxes were well in the red in 2008, 2009 and 2010, but in 2011, the firm moved to $161 million in the black. In the first quarter of 2012, Regions reported $0.11 in EPS, continuing the positive earnings trend. I am willing to say that Regions has turned a corner, and that the firm will aim to make its preferred dividend disbursements to maintain its credit rating.

In the next few weeks, I expect shares to return above $26 in a flight to safety. As the American housing market improves slowly, Regions should be able to enhance revenues. Also, the company is a takeover target, so that should buoy share price. Only for high risk investors do I suggest that they purchase these shares. Yes, all dividend payments have been made since inception, but the B+ rating ought to give retirees and risk-averse investors some caution.

Zions Capital Trust B, 8% Capital Securities (NASDAQ:ZION) has followed a similar route. The company had a ratio of earnings to fixed charges and preferred stock dividends below one between 2008 and 2010, but was 1.33 at the end of 2011. Earnings are in positive territory now, but still well below 2007 levels. The dividend yield is 7.7%, but does not qualify for the 15% tax rate. S&P gave a BB rating, but I would wait for a pullback to ~$25.50 before I can recommend a buy.

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