As many of my readers and followers have learned, I am a big fan of preferred stocks and the ability of preferred stocks to accomplish income/return goals of investors.
As I have learned, many of my readers and followers are not fans of preferred stocks which trade at premiums to par - as the yield to call can be less (sometimes significantly less) than the current yield of the preferred stock. I have also learned that many investors like utilities due to their (mostly) stable nature and cash generating - and paying - ability.
I think I have a win-win solution: A utility preferred that trades at/near par. Enter Southern California Edison (NYSE:EIX) Series F preferred stock.
Here are the details:
|Issuer||SCE Trust 1|
|Guarantor||Southern California Edison|
|Type||Cumulative Trust Preferred|
|Ticker||expected to be SCE-F|
|Early Redemption||June 15, 2017|
|Distributions||Quarterly, 3/15, 6/15, 9/15 and 12/15|
|Use of Proceeds||Repay commercial paper borrowings, to partially redeem other series of preference stock and/or for general corporate purposes|
|Tax Treatment||Qualified Dividend Income (15% tax prior to 1/1/13)|
Southern California Edison (SCE) is a subsidiary of Edison International primarily and is engaged in the business of supplying electricity to a 50,000 square mile service area in coastal, central and southern California, excluding the City of Los Angeles and certain other cities. The company owns and operates transmission and distribution facilities and hydroelectric, coal, natural gas and nuclear power plants for the purpose of serving its customers' electricity needs. In addition to power provided from its owned generating resources, Southern California Edison procures power from a variety of sources including other utilities, merchant generators and other non-utility generators. Based in Rosemead, California, Southern California Edison was incorporated in California in 1909, and had assets of $41.6 billion as of March 31, 2012.
SCE Trust, I will sell the Trust Preference Securities to the public and its common securities to Southern California Edison. The Issuer will use the proceeds from those sales to purchase $475,010,000 aggregate liquidation preference of SCE's 5.625% Series F Preference Stock. SCE will pay dividends on the Series F Preference Shares when, as, and if declared by their board of directors or a duly authorized committee of the board at the same rate and on the same dates as the Issuer makes distribution payments on the Trust Preference Securities. The issuer will use the payments, if any, it receives on the Series F Preference Shares to make the corresponding payments on the Trust Preference Securities.
The Series F Preference Shares will rank:
- Junior to SCE's cumulative preferred stock with respect to payment of dividends and junior to secured and unsecured debt and their cumulative preferred stock with respect to distribution of assets upon liquidation, dissolution or winding up. Southern California Edison currently has 4,800,198 shares ($120 million aggregate par value) of cumulative preferred stock outstanding.
- Senior to the common stock, and to any other equity securities that SCE may issue in the future that by their terms rank junior to the Series F Preference Shares.
- Equally with any other shares of preference stock, including the outstanding Series A, B, C, D and E Preference Stock, and with any other equity securities that may be issued in the future, the terms of which provide that such shares or securities will rank equally with respect to payment of dividends and distribution of assets upon liquidation, dissolution or winding up.
To show the value of this preferred stock, here is a list of outstanding preferred stock of Southern California Edison:
As you can see from the above table, the newly issued preferred is cheap to where the existing preferred stock of Southern California Edison trades, should be much more liquid and has a yield advantage of over 2.50% to the common stock of Edison International.
Bottom Line: This preferred stock makes sense for investors looking for both yield and safety. A yield north of 5.50% for an investment grade utility preferred stock trading at par is attractive and currently hard to beat. The preferred makes sense as an outright purchase or on swap with an existing SCE preferred or another utility preferred yielding less and/or trading above par.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.