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By Roger Choudhury

Trust preferred stocks will eventually not qualify as part of a firm's tier 1 capital due to Dodd-Frank. Many of these securities are high-yielding, and probably will be called away between 2013 and 2016. Issuers may reissue securities at lower yields, given the extraordinarily low interest rate environment. For example, US Bank (USB) has already called away two series in February 2012, and has announced calls for two other series of trust preferred securities in May 2012.

I searched for high-yielding trust preferreds from well-known issuers. Some issues trade above par value, but after collecting two dividend payments, you should make up for a future call. Moreover, after taking into account the taxation of dividends as ordinary income, you will gain a modest yield. Here is what I found:

BB&T (BBT) (Capital Trust V, 8.95% Enhanced Trust Preferred Securities)

Recent Price

$25.89 per share

Callable?

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

Dividends

$0.559375 per quarter

Next dividend payment is on Jun 15

Record date is on Jun 14

Current yield (after-tax yield)

8.6% (5.6%)

S&P Rating

BBB

Ticker symbol (Yahoo! / Google)

BBT-PA / BBT-A

The ratio of earnings to fixed charges and preferred dividends was 2.10, at the end of 2011. This is an improvement from 1.50 in 2010 and 1.67 in 2008. Fixed charges have fallen by 64.5% to $1.442 billion. The debt to equity ratio has steadily declined to 1.25 from 1.48 in 2008. Based on this relevant information, I believe that BB&T should continue to pay out dividends, at least, over the next four years. S&P also gives its seal of approval with an investment grade rating.

Over the next week, I expect this to dip below $25.70 as the market digests the ISM numbers, and faces the brutal realities of the ADP and jobs reports. However, if you are more bullish on the US economy for the next four weeks, then this should appreciate back above $26. Also, you have to weigh the possibility that investors may flee to preferreds in a stagnant economic situation, thus bidding up the price again. I believe that now is the right time to act, while it remains below $26. I recommend this for more aggressive income investors, although, retirees with the means may purchase this for a small portion of their portfolios.

Bank of New York (BK) (Capital V, 5.95% Trust Preferred Securities, Series F)

Recent Price

$25.37 per share

Callable?

Yes, at $25 per share, since May 2008

Dividends

$0.371875 per quarter

Next dividend payment is on Aug 1

Record date is on Jul 15

Current yield (after-tax yield)

5.8% (3.8%)

S&P Rating

A-

Ticker symbol (Yahoo! / Google / Fidelity)

BK-PF / BK-F / BK/PF

The ratio of earnings to fixed charges was 6.01 in 2011. The company has made significant progress since 2009, when this ratio was negative with a loss before taxes of $2.208 billion. Additionally, fixed charges were slashed by 79.4% to $721 million. The firm's debt to equity ratio has been tame, and below one since 2002. Profits have also surpassed 2007 levels. All in all, I say that the firm should be making preferred dividend disbursements for at least the next four years. I do not expect this series to be called any time within the next couple of years because it has a manageable yield.

Post-jobs report, I expect this to dip below $25.30. Over the next few weeks, this should remain above $25.20, as investors weigh mixed economic data. Next week, key data points will be the ICSC-Goldman Store Sales and NFIB Small Business Optimism Index. The latter will confirm the jobs report's trends. In addition, it might get a little dicey, if consumer spending stagnates or slows. In any case, I recommend this for retirees due to the investment grade rating and its remarkable price stability over the past six months.

Morgan Stanley (MS) (Capital Trust V, 5 3/4% Capital Securities)

Recent Price

$24.00 per share

Callable?

Yes, at $25 per share, since Jul 2008

Dividends

$0.359375 per quarter

Next dividend payment is on Jul 16

Record date is in the final week of Jun

Current yield (after-tax yield)

5.9% (3.8%)

S&P Rating

BB+

Ticker symbol (Yahoo! / Google / Fidelity)

MWO

Morgan Stanley has a debt to equity ratio of 3.38. This is high, but tolerable if considering the following. In 2007, this figure was 6.32. Fixed charges have also fallen by 87% to $7.5 billion. Additionally, the ratio of earnings to fixed charges and preferred stock dividends is 1.8. This is an adequate figure.

Profitability has almost returned to 2006 levels, and so I expect the shares to be called sometime within the next four years. On April 19, the company reported first quarter results. The debit valuation adjustment (DVA) cost the firm $2 billion, and so technically a loss of $119 million was incurred. Excluding this accounting rule, the firm made $1.4 billion or $0.71 in EPS, comparing to $736 million or $0.50 per share from a year ago. Also, excluding DVA, net revenue was $8.9 billion, which is up from $7.8 billion from the same quarter in 2011. This is a continuation of the positive earnings trajectory. Thus, I can say that the company should continue to make dividend payments over the next two years, at least. This is the lowest yielding of Morgan Stanley's trust preferred securities, and so would be among the last to be called.

You may obtain 4.1% in capital appreciation, in the event of a call. I expect the share price to fall to $23.70 in the coming weeks, as I project adverse consequences from the French presidential election and deficit problems in Spain and the Netherlands. I recommend this for investors seeking to take on a modest amount of risk, but desire to beat inflation by a couple percentage points. Instead of this, retirees should look at the two preferreds above.

One of my favorites to watch is Merrill Lynch (BAC) Preferred Capital Trust V, 7.28% TOPrS Preferred Securities. It is rated BB+, but I believe that Bank of America's preferreds should soon be upgraded to investment grade status. Then, I would feel comfortable recommending it to retirees. Also, it has an after-tax yield of 4.7%. The ticker symbol is MER-F.

Source: 3 Financials Preferreds Currently Paying 5% Yields