By Roger Choudhury
In the next few years, banks are going to call away their trust preferred securities because Dodd-Frank would no longer count them toward the tier 1 capital ratio. The estimated time frame to do so is between 2013 and 2016. Lower yielding trust preferreds are probably going to be called away later than higher yielding ones. Below, I focus upon trust preferred stocks that fit the criteria of lower yields. Essentially, these should fly under the radar over the next few years while banks call away their higher yielding counterparts.
Wells Fargo (WFC) (Capital IX, 5.625% Trust Preferred Securities)
Recent Price | $25.26 per share |
Callable? | Yes, at $25 per share, since Apr 2009 |
Dividends | $0.3515625 per quarter Next dividend payment is on Jul 1 Record date is on Jun 15 |
Current yield (after-tax yield) | 5.5% (3.6%) |
S&P Rating | BBB+ |
Ticker symbol (Yahoo! / Google / Fidelity) | JWF |
The ratio of earnings to fixed charges and preferred dividends is 4.69. By itself, this is definitely a great number to assess viability of future dividends, however, I will complete the analysis. Since 2007, fixed charges fell by 51.3% to $7.013 billion. The debt to equity ratio is 1.06, which has declined from 3.94 in 2008. In 2011, earnings increased by 11.6% to $30.327 billion. All in all, I conclude that preferred dividend distributions should continue over the next few years.
This trades above par value, but you will make up for a future call by collecting the first dividend payment. Over the next couple of weeks, I expect this to dip below $25.15, as worries metastasize about the global economy. A slowdown in Europe and the US will impact Asian economies, and result in fewer exports from the US and Europe due to declining demand. If you are looking to protect your assets by moving out of equities, then this instrument should be on your to-do-list. When the economy gets better, the share price will rise back to current levels, and you can choose to exit your position. Along the way, you may also earn a point or two above inflation by collecting dividends.
JPMorgan Chase (JPM) (Capital XII, 6.25% Capital Securities Series L)
Recent Price | $25.40 per share |
Callable? | Yes, at $25 per share, since Oct 2008 |
Dividends | $0.390625 per quarter Next dividend payment is on Jul 16 Record date is on Jun 13 |
Current yield (after-tax yield) | 6.1% (3.9%) |
S&P Rating | BBB+ |
Ticker symbol (Yahoo! / Google / Fidelity) | JPM-PX / JPM-X / JPM/PX |
The ratio of earnings to fixed charges and preferred stock dividends is 2.72. This has shown good improvement since 2008, when it stood at 1.07. Additionally, the debt to equity ratio has declined from 2.99 in 2008 to 1.57, at the end of 2011. Interest expense has also fallen by 58.2% to $9.749 billion. What this tells me is that the company is among the world's best capitalized and safest financial institutions. Therefore, I believe that preferred dividends should be paid out for the next several years until this is called away.
Because of its investment grade rating, in this economic environment, this should have more price stability than lower rated instruments. Investors are fleeing equities into safer fixed-income securities. The lowest that this may go is below $25.25 over the next few months. Broader declines in equity markets should not have much impact on this share price because it is defensive in nature. So, you are right to think that getting in soon would be a prudent item on the agenda.
Bank of New York (BK) (Capital V, 5.95% Trust Preferred Securities, Series F)
Recent Price | $25.31 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 at the end of 2011. Since 2009, the firm has made significant headway, when this ratio was negative with a loss before taxes of $2.208 billion. Moreover, fixed charges declined by 79.4% to $721 million. The debt to equity ratio has been low and below 1.0, since 2002. Profits have moved north of 2007 levels. Therefore, I think that the firm should continue preferred dividend payouts for at least the next four years.
As I thought, post-jobs report, this dipped, and eventually should go 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. I recommend this for retirees due to the investment grade rating and its remarkable price stability over the past six months.
BB&T Corporation (BBT) (Capital Trust VII, 8.10% Enhanced Trust Preferred Securities)
Recent Price | $25.84 per share |
Callable? | Yes, at $25 per share, after Oct 31, 2014 |
Dividends | $0.50625 per quarter Next dividend payment is on Aug 1 Record date is on Jul 31 |
Current yield (after-tax yield) | 7.8% (5.0%) |
S&P Rating | BBB |
Ticker symbol (Yahoo! / Google) | BBT-PC / BBT-C |
The ratio of earnings to fixed charges and preferred dividends was 2.10, at the end of 2011. This is higher than 1.50 in 2010 and 1.67 in 2008. Fixed charges have been slashed by 64.5% to $1.442 billion. The debt to equity ratio has steadily declined to 1.25 from 1.48 in 2008. Looking at it from this perspective, I believe that BB&T should continue to pay out dividends, at least, over the next four years.
This security takes a more defensive posture, and it should hover between $25.70 and $25.90 over the next few weeks. In the long run, it should dip below $25.70, but it may remain above $25.50 as more investors seek out investment grade preferred stocks. This also may tack on a few percentages points of yield above inflation, and is another reason to buy in. I recommend this for retirees that are looking for better yields from some of their portfolio. You must keep in mind that it is important to stay diversified, so do not dedicate 40% of your portfolio for this.
Rated one notch below investment grade is Bank of America's (BAC) MBNA Capital E, 8.10% TOPrS Trust Originated Preferred Securities, Series E. I mention this preferred because I believe that Bank of America is on a trajectory toward attaining investment grade status in the next year or so. The ratio of earnings to fixed charges and preferred dividends needs to go above 1, and it was at 0.89, at the end of 2011. Earnings have trended positively. The firm posted a smaller loss of $230 million in 2011, after a loss of $1.323 billion in 2010. First quarter results showed a profit of $653 million, after a debit valuation adjustment.
The preferred has an after-tax yield of 5.1%. The next dividend payment is on May 15 with a record date of May 14. The ticker symbol is KRB-E. Income investors with a medium risk profile should look into this.
